Rydex on a Wild Ride in '98
By Will McClatchy, Editor
Rydex is proof that smaller index fund groups can
still thrive. Securities Data Publishing rated it
the fastest growing fund family in 1998, during which
time it grew from $1.7 Billion to $4.1 Billion under
management. It achieved this by bringing out creative,
flexible products to give indexers a variety of ways
to play large cap markets.
"We are the only firm out there that identifies with
and is appropriate for all four basic investment disciplines:
market timing, tactical asset allocation, strategic
asset allocation, and sector rotation," said Rob Steele,
vice president for marketing and product development.
Rydex is used by 600 registered investment advisors
as well as institutional and retail investors.
Rydex leaves
the plain vanilla index fund to others, preferring
to concentrate on a variety of innovative twists to
indexing. Founded in July of 1993, Rydex began with
the Nova Fund, an S&P fund with beta of 1.5 (or 150%
participation) that gave market timers the opportunity
to leverage a bull market easily. "We cut our teeth
on market timers," said Steele.
Since then the firm has come out with a total of
22 funds. They include the Ursa Fund, which provides
the inverse of the S&P 500 for true bears, and the
U.S. Government Bond Fund, which gives investors 120%
participation in Long Treasury Bonds,
The firm's funds can handle frequent trades because
it does not only take simple long positions in indexes.
Commonly it will add future contracts to give it flexibility.
In the OTC Fund, for instance, it buys a basket of
stocks representative of the Nasdaq 100 and overlays
a variety of option contracts. Naturally it also offers
an inverse Nasdaq 100 fund, the Arktos Fund.
"We will provide an index based approach, but if
you buy a product from us, you can trade it," said
Steele. About 20% of his advisors clientele are "twitchy",
that is, they trade over 15 times a year for their
investors.
In addition, there are 14 capitalization weighted
sector funds. Each requires a minimum capitalization
and liquidity. In addition, top stocks are underweighted
slightly if Rydex management feels they are dominating
the index.
"Microsoft does well and money flows to Microsoft.
Microsoft does well and its index does well. People
see the index do well so they invest in it. Then more
money flows to Microsoft. It goes around and around.
Normally Microsoft would be such a huge component
[of the technology sector fund] we had to manually
pare that down," he said.
Finally, stocks that correlate poorly with the others
are removed, so that the result is a basket of stocks
that move in tandem within their sector, giving a
more "pure" play.
"The money manager knows that if he is buying banking
he is buying large cap weighted stocks that act like
banks," he said.
Holdings are updated and published every week, so
investors know what they are getting at all times.
Steele sees the bull market causing certain types
of investors to revise their practices. For instance,
market timers have all but given up hope on waiting
for the bear market and are now increasingly rotating
from sector to sector.
"Sector rotation is one of those all weather approaches,"
he said. "There is always something going on in a
sector."
In addition, strategic asset allocators are becoming
somewhat more tactical. "I see a lot of frustrated
strategic asset allocators out there," he said. "Some
of them are thinking of throwing in the towel to play
a little catch up. Some of them are considering increasing
their exposure to large growth."
Although value will bounce back, said Steele, for
the moment growth still seems to have the momentum.
"It's almost a self-perpetuating process," he said.
"Most managers would prefer to have 20% cash at this
point, but many say 'I can't afford it because I have
to keep up with the Joneses down the street' and they
are fully invested."
The company is not stopping here. It has 8 more funds
on the drawing table and should come out with several
new ones this year.
©1999 IndexFunds.com
