David Tice, manager of the $1.2 billion Prudent Bear Fund, used to be one of the fund industry’s biggest outliers. In fact, just a few weeks ago he told BusinessWeek that contrarian investing can be “a lonely career.”
But my, how times have changed. The bear strategy is going mainstream, and Tice suddenly has a lot of pinstripe suits hanging out in his lair: Federated Investors (FII), a huge asset management firm, announced plans today to acquire the Prudent Bear Fund as well as the $507 million Prudent Global Income Fund.
Does the sale of the Prudent Bear fund signal the bottom of the bear market? I’d like to say it does, but I’m not smarter than the average bear. Neither is David Kathman, the Morningstar analyst who follows the Prudent Bear Fund.
That said, Kathman does think there is something to be gleaned from market sentiment. He has been fielding a slew of phone calls about bear funds for the past six months. “People see a bear fund’s trailing 12-month returns and compare it to their portfolios. They say ‘I wish I owned that,’ ” Kathman says. “That’s usually a pretty bad time to get into a bear fund.”
But the rules of investing don’t necessarily apply to the Prudent Bear Fund. “The Prudent Bear Fund is the cream of the crop of the bear funds,” Kathman says, pointing to the fund’s chart-topping returns for the past 3-, 5-, and 10-year periods. (It’s up almost 8% so far in 2008.) Because it is actively managed, Tice “has done a good job of protecting shareholders so that the fund often goes up when the market goes up, just not as much as the indexes,” Kathman says.
Indeed, the Prudent Bear Fund posted gains in five of the past seven years. But it only rose 9.1% in 2006, while the S&P 500 gained 16%. Tice told me in April that the fund’s long-term stake in gold stocks such as Capstone Mining (CS.TO) and Golden Cycle Gold (GCGC) “is not a perfect hedge, but it’s a natural hedge against [Federal Reserve Chairman Ben] Bernanke’s money printing and credit creation.” As a short seller, he’s been down on retailers as well as financial companies.
According to the press release, the purchase price of the Prudent Bear sale includes a $43.0 million initial payment to Tice’s firm, along with future contingent payments of up to $99.5 million over the next four years. That’s a lot of honey. Being a bear is pretty sweet, don’t you think?