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Five Funds to Buy in a Market Crash

Brett Arends

No, I'm not saying one is guaranteed, or even likely -- although the events of the last couple of weeks make you wonder.

What I'm saying is that you need to be prepared in case one happens. You need to know how much investment money you can get your hands on quickly, and what you're going to buy in a sudden fire sale.

Why?

Because if you are a long-term investor, a stock market slump is a heaven-sent opportunity to find some bargains. Obvious, but true: You are far better off buying stocks when they're cheap than when they're expensive. Most Americans are kicking themselves for getting out of the market back in 2001 and 2002, when they should have been getting in.

	Are you more comfortable investing in funds or individual stocks right now? Answer Here

The lessons of history are unambiguous. Those who have invested in the stock market when it has collapsed and have then held on for the long term have ended up doing extraordinarily well.

As the old Wall Street saying has it: The time to buy is when there's blood on the streets.

Naturally, this is a lot easier said than done. If the Dow plunges 3,000 points, that's when it's hardest to steel yourself to jump in. Most people, by definition, are rushing to get out. And, of course, that's when everyone on Wall Street will be screaming and predicting the Dow will drop another 3,000.

And even if you do buy, the temptation will be pretty powerful to panic and get out again if things keep falling.

So how do you get round the nerves?

Here's one idea: In a market panic, don't chance your hand buying individual stocks. Give your money instead to a select group of market veterans and let them deal with it.

The right managers will know how to profit from the panic by sifting the real bargains from the market's booby traps. And they will give you some pretty good downside protection. Actively managed funds tend to hold up better than the index when stocks collapse.

I'm not just talking about ordinary, run-of-the-mill mutual funds run by a big investment company either. Those managers are too busy watching their backs in the corporate shuffle to act freely.

Nor am I talking about index funds.

I'm talking about those rare funds run by seasoned captains who know how to sail through a stock market hurricane.

The ones where the manager has the flexibility, the experience and the skill to buy the right things at the right time. And where that manager is prepared to sail into the wind because he's done it so many times before.

Who are these rare and special managers?

Here are five of them. If the market suddenly collapses and you don't know what to buy, just call your broker and try these. In each case, to show their bear market credentials, I've added how they fared from the start of 2000 through the end of 2002, while the S&P 500 index plunged by almost 40%.

• Berkshire Hathaway BRK.B. Of course, Warren Buffett may be the greatest investor who ever lived. And although he's well into his seventies, he still seems to be going strong. Berkshire Hathaway is a stock rather than a mutual fund. But it's a well diversified investment vehicle, and Buffett has been holding tens of billions of dollars in cash in reserves in case there's a total meltdown. He is an old-fashioned, conservative "value" investor who looks for strong company fundamentals , excellent cashflow and a great "margin of safety" before he buys a stock. If there's a panic on Wall Street, let Warren do your bargain hunting. From 2000 through 2002, he was up 30% (although to be fair the shares were helped at the time by the stock-specific issues).
• CGMFXCGM Focus (CGMFX). How good is manager Ken Heebner? Try this. Lipper ranks him top among his peers over three and five years -- and, it so happens, so far in 2007 as well. This year he rode the boom in investment banking stocks and then jumped out in late July, when they started falling apart. His returns through July 31 -- a stunning 30.4%. He's famous for moving quickly when he spots an opportunity and taking bold bets. And that makes him a great guy to have placing bets for you when the going gets rough. In 2000 through 02, he was up 87%. (No, that is not a misprint.)
• QUAGXQuaker Strategic Growth (QUAGX). Regular readers know I'm a big fan of manager Manu Daftary (and an investor in his fund). And why not? He has one of the best records in the business. Daftary's fund gives him broad flexibility to do his thing. He can hold cash, and even hedge positions by going "short" with some of his portfolio and betting on a market fall. The result? Over the past 10 years he's turned $10,000 into nearly $48,000. And a lot of that outperformance came from avoiding the worst of the bear market. From 2000 through 2002, he was down 12%.
• GLVClough Global Allocation (GLV). Fund manager Chuck Clough has been around. He used to be a strategist for Merrill Lynch before he quit to run money on his own. After managing hedge funds for rich clients and institutions for several years, he opened the door to ordinary investors, launching three closed-end funds, which trade all day on the exchange like an ordinary share. At Global Allocation, he takes a flexible and worldwide approach, buying stocks or bonds wherever he sees value. The fact that it's a closed-end fund is especially good news for investors. First, it gives Clough lots of freedom in a panic, because he doesn't have to worry about redemptions (closed-end funds issue a fixed number of shares, like a company, and people who want to get out simply sell their shares in the open market). The second advantage: The shares already sell for 10% below net asset value, and in a market rout you can bet that discount will widen. That's a bargain for investors. Global Allocation wasn't launched until 2004, so there is no performance data for 2000 through 2002.
• TACFXThird Avenue Value (TAVFX). If there's one go-to guy in a free-for-all rout, it's the legendary 70-something manager Marty Whitman. He'll be the one snapping up anything from value stocks to distressed mortgage debt, and if history is any guide he will turn out a winner. Whitman does the stuff most fund managers are too scared to -- like loading the boat with K-Mart (now part of SearsSHLD) when it came out of bankruptcy a few years back. From 2000 through 2002 his fund was up 5%.