How to Invest During an Economic Crisis - TheStreet

Those who say "this time it's different" in describing the current financial turmoil could use a reminder that, a mere decade ago, a surprisingly similar situation existed.

A good lesson for investors to bear in mind is that those who kept faith in the markets during the crisis were extremely well rewarded.

Assuming the U.S. economy recovers from its current lapse, as it always has in the past, similar rewards are possible for those who brave the prevailing negativity and stick with the long side of the stock market.

The current crisis bears remarkable similarities to the Asian economic crash that started 11 years ago this month -- first a devaluation of the Thai currency, then a major collapse of markets and currencies throughout East Asia. Yet, those who bought mutual funds with holdings in that region 10 years ago, when the outlook in that region seemed bleak, experienced explosive growth over the subsequent decade.

Funds that have quadrupled or better in the 10 years since the depths of the "Asian contagion" are summarized in the accompanying table. A second list shows some beaten down funds that optimists might consider in these uncertain financial times.

The current U.S. slump is remarkably similar in many ways to the Asian collapse that began in 1997, as can be seen from these descriptions of the Asian situation by the Federal Reserve Bank of San Francisco and the U.S. Congressional Research Service:

It was an "unprecedented financial crisis" caused in part by a "classic financial panic."

"Disruptions in bank and borrower balance sheets have led to wide bankruptcies and interruption of credit flows."

The economic shocks were "what some describe as 'runs' on financial systems and currencies."

A major weakness was "lack of incentives for effective risk management."

The crisis was "created by implicit or explicit government guarantees against failure."

"Events were accompanied by pressures in the foreign exchange market."

A major political figure attacked "rogue speculators" as contributing to the problems.

The collapse of a major investment firm exacerbated the crisis.

Short-term debt held by financial firms was converted to government-backed loans in an effort to remedy their problems.

Those who braved the uncertainty of the Asian turmoil of a decade ago and acquired mutual funds focusing on that region have been handsomely rewarded. Of 66 Asian and Pacific region funds with performance histories of at least 10 years tracked by TheStreet.com Ratings, the average fund has nearly quadrupled over the past years, up a cumulative 277.50% for the period. That's more than eight times the aggregate return of 32.9% for the

S&P 500

total-return index over the period.

On an annualized basis, the return for the average Asia/Pacific region fund over the decade since the East Asian crash has been 12.7% vs. 2.88% for the S&P 500 total return benchmark.

The accompanying table shows a sampling of funds invested in the hardest-hit East Asian countries of Thailand, Indonesia, Korea, Malaysia, Taiwan, Singapore and Hong Kong.

Besides returns from rebounding stock prices, U.S. investors who braved the Asian contagion were rewarded when the Asian currencies recovered from panic levels and then steadily appreciated against the greenback over the past decade.

At this point, no one really has a clue as to when the domestic market finally will look beyond the current economic malaise and start to move broadly higher. But assuming a new bull market will eventually emerge, the funds on the adjoining table of beaten-up "buy-rated" funds are worth considering. They all sport grades in the "A" and "B" ranges from TheStreet.com Ratings, which equate to "buy" recommendations.

Each of the open-end, closed end and exchange-traded funds on the list has suffered a loss of more than 15% over the past year -- ground that it is hoped they will all quickly recover in a broad market advance.

The funds on the "beaten-up" list represent a diversified selection, with six members focusing on investments outside the United States, two funds with worldwide (domestic and foreign) investment horizons, three small cap funds, two equity income specialists, a growth fund and a growth and income portfolio.

The list includes the venerable closed-end

Zweig Fund

(ZF) - Get Report

, which has surrendered 16.31% over the past year but has bucked the downtrend more recently with a three-month advance of 3.32%.

Its largest holdings include

Halliburton

(HAL) - Get Report

,

ConocoPhillips

(COP) - Get Report

,

Freeport-McMoRan Copper & Gold

(FCR)

and

Gilead Sciences

(GILD) - Get Report

.

Although it has skidded 19.05% in the past 12 months, including a slide of 7.07% in this year's second quarter, the closed-end

Boulder Growth & Income Fund

(BIF) - Get Report

lists among its top holdings such stalwarts as

Berkshire Hathaway

(BRK.A) - Get Report

,

Wal-Mart Stores

(WMT) - Get Report

and soon-to-be-acquired

Anheuser Busch

(BUD) - Get Report

.

BIF ended the first half of 2008 quoted at a modest 0.14% premium over its net asset value per share, making it the only closed-end or exchange-traded fund on the list priced above NAV. That was in strong contrast to the closed-end

Eaton Vance Tax Advantage Dividend Income Fund

(EVT) - Get Report

, which at the end of June was selling at a discount of 13.90% from its NAV.

EVT, which is 28.5% in the still-shaky financial sector, has as top holdings

AT&T

(T) - Get Report

,

Chevron

(CVX) - Get Report

and

Marathon Oil

(MRO) - Get Report

.

The author has a long-term position in the Korea Fund (KF) - Get Report.

Richard Widows is a senior financial analyst for TheStreet.com Ratings. Prior to joining TheStreet.com, Widows was senior product manager for quantitative analytics at Thomson Financial. After receiving an M.B.A. from Santa Clara University in California, his career included development of investment information systems at data firms, including the Lipper division of Reuters. His international experience includes assignments in the U.K. and East Asia.