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New Meridian Funds Seek to Limit Downside With 10% Upside


Craig Callahan thinks he has something that investors want: a little peace of mind.

As volatility in the stock market continues to frighten the daylights out of investors, Callahan, founder and chief operating officer of Denver-based Meridian Funds, thinks they will be attracted to funds that won't necessarily yield astounding returns in a bull market. On the flip side, the investments aren't likely to post sickening declines in a bear market, either.

In fact, Callahan, who left a teaching job at the University of Denver to found Meridian in 1997, is building the strategy for four of his company's new funds around the idea.

Meridian has registered with the Securities and Exchange Commission to open new bond, equity income, option, and hedge-like funds that are expected to debut later this month.

Each of the new funds, which will be part of Meridian's Icon fund family, is designed to yield returns of around 10%. That might be considered lackluster compared to boom years of the late 1990s, but Callahan thinks investors won't mind.

"Investors will be willing to sacrifice the upside to get downside protection," he said.

The firm currently manages 14 funds, not including the four new products, and oversees about $1 billion in assets.

On the flip side, with the market as awful as it has been over the past 2-1/2 years, 10% annual returns may be a pipe dream. Bill Gross, managing director of PIMCO of Newport Beach, Calif., predicts both stocks and bonds could return a paltry 2% over the coming years.

Nevertheless, Meridian's bid to launch the four new funds comes at a time when mutual fund companies are scrambling to give investors new alternative products. For example, an eight-page advertisement that Merrill Lynch ran in The Wall Street Journal late this summer made little mention of equity mutual funds, instead providing information about bonds, real estate and other investments.

Callahan said his firm has been planning to offer the new products for some time, and the strategy is "much more based on our view of the next decade than it is any reaction to the last couple of years."

Unlike Gross, Callahan believes equities will likely yield returns of around 10%, basing his premise on the normal state of the market. The bloated stocks of the 1990s, which sometimes yielded returns of 50% or more, were an aberration, he said.

Dimmed-Down

Investors who hope the equity market will return to those stellar levels will be disappointed, Callahan said, but the ones who learn to capitalize on the dimmed-down market will benefit.

"The investors that I think will do well will recognize that the '90s were not normal," Callahan said, adding that investors should be thinking, "I made a mistake. Let's learn from it.'"

One of the new funds, Icon Equity Income, will buy convertible debt from roughly 30 companies. Callahan expects the portfolio to yield returns of between 9% and 10%. Should stocks spike again, as they did during the last bull market, the fund won't benefit. But the fund offers more stability than equities while yielding better returns than a typical bond fund, he said. The fund will be based on the same 80 to 95 stocks that make up the Icon Fund, which means that Meridian is already positioned to launch the product.

"It's not like a growth company bringing out a value fund," Callahan said. "We can manage this with the same team."

Another product, the Icon Long Short Fund, will take a long position in 15 to 20 of Meridian's most-favored industries and a similar number of short positions in industries the firm believes will falter. The fund will require a minimum investment of $1,000.

"In a sense, it's a hedge fund for the average investor," Callahan said.