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Bearing Glad Returns


SAN FRANCISCO-Mutual funds had no idea in 2008 of what to do in a major bear market, according to W.H.C. Bassetti.

"They had no method for protecting themselves against a slide in stocks,'' said the adjunct professor of finance and economics at Golden Gate University last week at the TradeTech West conference here.

That may be so. And, indeed, stocks have slid quite a lot. They are so out of favor that investors, both individual and institutional, have pulled their assets out of funds that invest long-term in U.S. stocks, relentlessly.

Since the outbreak of the credit crisis almost exactly four years ago, $427.5 billion has been pulled out of funds that invest long-term in U.S.-based stocks.

This week, you can expect that total to surge past $550 billion, going back to the start of 2007, when the first glimmers of the subprime mortgage debacle began to get serious attention.

In fact, sales of collateralized debt obligations were red-hot in February 2007.

The outstanding amount of these mortgage-backed securities-called CDOs-had doubled in two years, standing at $2.6 trillion when 2006 ended. A record $769 billion had been sold that year, according to Bloomberg.com.

At precisely that point, Goldman Sachs began betting against such derivatives, at the time the fastest-growing business on Wall Street. It, alone among the big investment houses, noted that the Case-Shiller Home Price Indices for major metropolitan markets peaked in August 2006 and declined for almost a year.

That was a sure tipoff that debt based on below-grade criteria would founder.

Now, mutual funds are back (See "Comeback from Crisis: The Four-Year Rebound,'' page 1.) More than $12.6 trillion in total net assets, finally surpassing the pre-crisis record.

The big winners? Bond funds, picking up nearly $900 billion.

Federal Reserve chairman Ben Bernanke indicates low interest rates will continue through 2015, as the economy remains sluggish.

But better be ready, this time, to spot the turn.

Because, once rates rise again, stock funds will be where you want your clients to be. And your best products.