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Industry Puzzled Over Rydex Rotation Fund

Rydex Funds has launched a sector rotation fund into the teeth of a market still skeptical about sector funds after the carnage of the past two years.

Executives at fund companies said this moment is probably a poor one for introducing innovative products to investors.

"Customers want stability right now," said a bank mutual fund executive, who declined to be named. "They want fixed income. They want value. They want to be sure their money is where they left it the night before."

Another executive said, "You could be introducing instant money right now, and it wouldn't succeed. It doesn't matter how safe it is or how right it is. Now is just not the time."

Despite the skepticism, Rydex started the sector rotation fund late last month, aiming it at conservative investors who are cautious about investing in specific sector funds during a bear market. According to a Rydex executive, the fund's investment strategy is so well spelled out that it should remove investors' uncertainty about what is being done with their money.

The Rydex Sector Rotation Fund is to rotate investments on a monthly cycle to specific industries that have performed well and sell out of sectors where performance has lagged.

Charles Tennes, the fund's portfolio manager, said it is only the second sector rotation fund in the market. He said it is suited for conservative investors looking for a product with a strategy they can understand. "Investors want to know precisely what the strategy is," Tennes said. "People are demanding more transparency. They want to see different strategies at work."

Rydex, a Rockville, Md., fund company, sells 32 investment products, including 17 sector funds out of a total pool of 59 sectors it analyzes. Once a month, Tennes said, Rydex analysts assess and rank these 59 sectors based on price appreciation in the preceding 12 months, and then buy into the top one-fifth of the sectors. "This strategy carries its own self-discipline," Tennes said. "Whatever doesn't make the top quintile will be sold. People have learned over the past 18 months that holding on to a stock or a fund too long is dangerous."

Burton Greenwald, a Philadelphia mutual fund analyst, said the new product could be attractive to conservative bank clients.

"When you are dealing with volatile markets, innovative products don't always work. But if you can get the right hook, it can attract a lot of customers," Greenwald said. "People want to believe they are adventurous; investors want to stay in sector funds; but no one wants to bet the farm ... again" as many did on technology stocks, he added.

Austin Crowe, manager of the other sector rotation portfolio -- the T.O. Richardson Sector Rotation Fund -- said interest in such funds has petered out since the stock market slumped. His fund, which manages $20 million of assets, was started in 1998 after a separately managed account he ran with a similar sector-rotation style got too large. T.O. Richardson Co. of Farmington, Conn., is the fund's investment advisor.

"We generated a lot of hot money at the end of 1999," Crowe said. "But a lot of people dumped out when the market fell out of favor." He said his fund has kept pace with the Standard & Poor's 500 Index during the bear market but that it has fallen out of favor with investors and distribution channels.

"A lot of investors are interested in short-term performance," he said. "This is a strategy that [would] work over a longer period, but in a short time frame, it isn't a quick hitter."

Crowe said launching a product like this right now is like launching a large-cap growth product. "There has not been much interest lately," he said. "Most banks and investment houses are interested in selling their own funds. For a small player like ourselves, it is a hard market to crack."

Tennes, however, sees things differently. "There has been a great demand for a product like this from a firm like Rydex," he said. "Investors want to buy it, and banks and insurers want to sell it."

-- American Banker