Market-Neutral Funds Get Highest Ratings

Eight of the 10 best-rated stock mutual funds employ variations on market-neutral strategies, which tend to work better in bear markets.

One balances stocks with currencies and gold, and the other went into cash as the manager waits for the market to bottom before jumping back into domestic growth stocks. All of the funds earned a rating of A-plus for the period ending Feb. 27.

The best-rated stock mutual fund last month, when the benchmark S&P 500 index fell more than 100 points to about 700, was the JPMorgan Market Neutral Fund(JMNAX), averaging a return of 5.4% over the past three years. Market-neutral funds can use long and short positions on stocks to balance overall market risk. This fund looks for mid- and large-capitalization stocks considered to be overvalued for short sales and balanced against undervalued stocks to buy within the same sector.

Favored long positions, which make money for the fund's shareholders as they rise, include Abbott Laboratories (ABT), Verizon Communications (VZ) and Qualcomm (QCOM). Some of the largest short positions from which the JPMorgan Market Neutral Fund hopes to gain as their share prices sink include Texas Instruments (TXN), Johnson & Johnson (JNJ) and Intel (INTC).

The second-best-rated fund was the Arbitrage Fund(ARBFX), which posted an average annual return of 4.18% over three years by placing merger-arbitrage bets on publicly announced takeovers, leveraged buyouts, tender offers and other reorganizations.

The fund's manager seeks acquisition target companies that sell for a discount to their announced sale price. When one company proposes to buy another they generally offer to pay more than the prevailing market price.