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  Nervous investors should remain wary of professional market bears, our contrarians say.

BENJ GALLANDER and BEN STADELMANN

Saturday, May 13, 2000

Recent market wobbles have brought a few bears out of hibernation, snuffling about for a measure of vindication. And a meagre measure it is. We told you stocks were overpriced, they growl.

Sure, if you sound the alarm of impending doom for long enough, you are bound to be right. It's what happens in the meantime that really counts in assessing if the advice was worthwhile.

Although bear funds, which aim to protect investors in declining markets, are a rare species, with a few old hands throwing in the towel as the stock boom wore on, there are a few remaining with long-term records that are worth examining. But you'll have to look to the United States to find them.

Comstock Partners is one of the oldest of these, having made a big splash by going bearish in advance of the 1987 crash. This auspicious move led to a flood of new money, and funds under management mushroomed to more than $2 billion (U.S.).

Unfortunately for these smitten investors, manager Charles Minter has followed a quixotic path since then, consistently calling the market overvalued and keeping the majority of assets in cash, with side bets on gold and puts against market indexes. The average annual loss for his Capital Value Fund in the past five years is a dreadful 19 percent. The scale of this horror is brutal to comprehend: Imagine the miracle of compound interest speeding in reverse. A dollar invested in May, 1995, would be worth just 24 cents today. Put another way, the fund would have to quadruple just to break even over the period. No market crash, no matter how severe, could rescue the performance from these depths.

This disaster would still be understandable if it were a true bear fund, that is a fund like Rydex Ursa Fund, which mechanically uses derivatives to achieve the inverse of the performance of the Standard & Poor's 500-stock index. Mr. Minter, who actively manages the Capital Value fund (with a hefty 4.5 percent load fee) professes to use macro-economic analysis to remove the emotional element of investing. Maybe so, but even catatonia does not explain how it is possible to lose so much money with around 85 percent of its assets in cash.

Other bearish funds have done better, but not much. David Tice, who runs the Prudent Bear Fund and is frequently featured in Forbes magazine, has had a decent run this year, up 8.4 percent. Like Mr. Minter, Mr. Tice doesn't simply short the market, but uses asset allocation to balance long, short and cash positions in order to make money in all market conditions. But the fund has still lost more than half of its value since its debut in September, 1996. That's a long, long way to come back from, and even if it capitalizes on a market drought, it is highly unlikely that long-term holders will ever see the light of day.

So, as interest rates ratchet higher, what is an investor to do? Just grin and hold on hoping that not too much of the lovely gains made in the past few years will be gobbled up? We have chosen the compromise of adopting a defensive posture until market valuations return closer to historic norms. This entails the sale of big winners, increased cash reserves and holding quality income-generating assets such as utilities and some of the better investment trusts.

For stock selection, the focus is on companies with recession resistance. One of our favourites of this type is Fleming Cos. Inc. (FLM--NYSE), a distributor of food and merchandise to supermarkets in the United States with annual sales of $14.6 billion. It has been a standout performer in the portfolio, up more than 50 percent for the year to date, and now trades in the $15.50 range.

Another attraction is companies that have gone through their own defensive measures. Since we purchased Spar Aerospace Ltd. (SPZ--TSE) in December, 1997, at $8.35 (Canadian), it has sold its robotics and space divisions at a substantial profit, and returned $3.35 a share to shareholders. It's now focused on the less sexy aviation maintenance business, an operation we figure to be resilient in difficult times, that powers a dividend of 76 cents a year. It's trading in the $7.25 range.

As for shorts and puts, we never do that within the portfolio. If you have a strong hunch about what the market is going to do next Monday, by all means, buy a put. Just don't delude yourself into thinking that what you are doing is investing.

Such bets are pure gambles, for to be right not only about the direction of stocks but also about exactly when they will move, is the stuff of clairvoyance. Put such action into the account that handles forays to Las Vegas or Saturday night poker games. Leave the serious study of chicken entrails to the professional bears.

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