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What's floating on market's rough waters

Posted by: Aaron Pressman on August 13, 2007

With stocks gyrating over the past month, it’s a good opportunity to review what’s working — or not — in different pockets of the market. The iShares Russell 3000 Index (Symbol: IWV), a proxy for almost the entire U.S. stock market, is down 4% over the past month while remaining up 3.24% for the year, according to Morningstar. One weak month of U.S. stocks probably isn’t a true test of various alternative investment ideas, but even in this quick snap shot, there’s yet more evidence for the benefits of smart diversification.

As I warned the other day, international markets provided no shelter. Many have lost even more than the Russell 3000. The best proxy for developed markets beyond the U.S., the iShares MSCI EAFE Index fund (EFA), lost 6.2% over the past month. In emerging markets, the S&P SPDR (GMM) lost 5.9%.

So what’s working better? A quick look over Morningstar’s ETF performance rankings find the obvious shorting funds at the top. For example, the Ultrashort Russell Midcap Value Proshares Fund (SJL) has a 20% gain over the past month. Nice but I’m not sure how many folks are into using leveraged index short funds, especially such narrowly tailored ones.

Among more mainstream categories, it has certainly been a good month for Treasury bond funds, which benefited from a flight to quality and safety. The iShares Lehman 7-10 Year fund (IEF), for example, was up almost 2% in the past month. Currency funds have also held up well. Over the past month, the CurrencyShares Japanese Yen Trust (FXY) rose almost 3%, the Swiss Franc version (FXF) gained 0.7%, the British pound (FXB) fund rose 0.2% and the Canadian dollar (FXC) and Euro (FXE) were flat. Powershares DB G10 Currency Harvest Fund (DBV), a more complicated play that buys three high-yielding currencies and shorts three with low yields, dropped 2.2%.

Closed-end currency funds were hurt by a general distaste for the format, as their stock prices trailed the actual results of their holdings. The Global Currency & Income Fund (GCF) lost 3.5% even as its assets lost 1% and the Nuveen Multi-Currency Short-term Government Income Fund (JGT) crashed 8.1% over the past month while its asset value dropped less than 2%.

Commodity funds haven’t fared as well, though better than the Russell 3000. The iShares GSCI Commodity-Indexed Trust ETF (GSG) lost 3.4% over the past month and the Powershares DB Commodity Index Tracking Fund (DBC) fell 3.6%. Pimco’s commodity-tracking mutual fund (PCRAX) lost 2.38%, no doubt aided by its inflation-indexed bond holdings. Pure-play timber stocks did better than most broader commodity funds, with Plum Creek (PCL) losing 2.5% and Deltic Timber (DEL) gaining 5.5% over the past month. International real estate funds did quite poorly, as the Fidelity (FIREX), Cohen & Steer’s (IRFAX) and Alpine (EGLRX) funds I’ve mentioned on the blog lost an average of 4.5% over the past month.

How did some recent suggestions for playing the credit crunch fare? The Rydex Inverse High Yield Strategy Fund (RYILX) gained 0.5% over the past month. And what if you tried financial adviser Gary Gordon’s strategy of buying the iShares Lehman 7-10 Year ETF (IEF) and shorting either the iShares Goldman Sachs Corporate Bond (LQD) or the iBoxx High Yield Corporate Bond (HYG) funds? As noted above, the Treasury fund gained almost 2% over the past month. The Goldman ETF lost 0.5% and the iBoxx fund lost 3%, so that worked. The Chicago Mercantile Exchange’s new credit default futures contract was probably a great short, but I can’t navigate their site well enough to figure out just how well.

What about some of the market neutral mutual funds I’ve mentioned of late? It’s a mixed bag for these quasi-hedging funds. Hussman Strategic Growth (HSGFX), which combines an actively-managed stock portfolio with index options, gained almost 1% over the past month and Nakoma Absolute Return Fund (NARFX), which can take big short positions, was up 0.4%. J.P. Morgan’s Multi-cap Market Neutral Fund, which balances equal long and short positions, fared quite poorly, however, dropping 5.25%. The fund’s quant focus probably didn’t help in the recent sell-off which hit “value” stocks harder than the rest of the market. As of the end of June, the fund’s long positions had lower price to earnings and price to book ratios than its short positions.

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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