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By Kathleen Day
Washington Post Staff Writer
Sunday, October 4, 1998; Page H3

Markets worldwide are down, investors are jittery, and David W. Tice is finally sitting pretty, at least for now.

The mutual fund he manages, the Prudent Bear Fund of Dallas, came into its element this summer and finished the third quarter as the best-performing equity fund, returning 21.93 percent while the average stock fund fell 15 percent.

The second-best record for the quarter also was posted by a fund that bets on falling stock prices. Profunds UltraBear of Bethesda, managed by Bill Seale, a professor of finance at George Washington University's School of Business and Public Management, finished with a return of 17.88 percent.

Both funds have to hope the bear sticks around for a while. Even with its third-quarter performance, for example, Prudent Bear was up just 1.27 percent for the first nine months of the year.

Tice set up his fund 2½ years ago on the belief that the stock market's boom was overdone, and that the market was headed for a sustained downturn.

"We felt like we were in the midst of a mania and that the stock market would fall dramatically," he said from his car phone while driving to work Friday morning. "We were a year or so too early, but we were confident."

That's why he said he hasn't been deeply troubled by more than two years of underperformance. The fund declined 13.7 percent in 1996 and 4.3 percent in 1997.

"We kept telling people the market was a bubble but that we wouldn't be able to time exactly when it would burst," he said. The goal until the downturn came, he said, was to lose as little as possible while waiting for his strategy to pan out.

Tice uses 80 percent of the fund's $200 million in assets (as of Friday) to sell stock short. Short sales are executed with borrowed shares; the seller hopes to buy replacement shares at a lower price and pocket the difference but must be ready to pay a higher price – and lose money – if the stock rises sharply.

Tice's favorite shorts are in technology and health-care companies, and he also targets financial service companies that require constant access to the credit markets. These would include such stocks as MBNA Corp. of Wilmington, Del., a huge credit card issuer.

"We believe the economy is going to go through a severe credit crunch," he said. "And profits are going to be harder to come by."

Tice also holds 10 percent of the fund's assets in stocks of gold and silver companies, whose prices he believes will go up despite all the efforts by Federal Reserve Board Chairman Alan Greenspan and the central bankers of other countries to counter deflation.

Another 5 percent of the fund's assets is in options to buy and sell securities at specified prices, and the remaining 5 percent is in cash.

Tice believes the bear market is here and is going to stay for a long time, unlike the mini-bears of 1981, 1987 and 1991, when investors recouped their losses within 18 months or so. Anyone who invested in the market at its peak in July, he said, will need 10 to 20 years to recover.

But he's not entirely negative. His fund is mostly short when dividends of the Standard & Poor's 500 stocks are at 3 percent or less. If the dividends go above that level, he said, he will consider holding more long positions – buying stocks for his portfolio with cash.

Seale said investors can move without penalty among Profund's six funds, including UltraBear, which lets them bet which direction the market is going. "We don't make that judgment," Seale said. "We provide the investment tools through these funds for investors to do that."

UltraBear is one in a family of funds that invest in futures contracts and options on futures so that they are geared to move in the opposite direction of several index funds. UltraBear itself is geared to move at twice the rate of the S&P, but in the opposite direction.

The funds that Tice and Seale manage are profiting from the market downturn, but both caution that, despite their beliefs, investors would do well to remember that when it comes to the market, there is no sure thing.

Scott Cooley, an equity fund analyst with Morning star Inc., said bear funds may give some psychological comfort to some investors. But he said investing in such funds "is a losing proposition over the long term."

Tice said that while his pessimistic view of the markets at the end of 1995 has finally become reality, he's not completely happy about it.

"I'm not cheering for this to happen," he said. "I have two young daughters, and I want prosperity for this country."

Seale takes the same view. "My retirement fund is tied up in the market like everyone else's," he said.