Like most investors, my first dips into the stock pool were through mutual funds. I would like to think I have outgrown those training wheels, yet I always find a mutual fund or two creeping back into my portfolio.
Whether it's buying into obscure companies overseas through Oakmark International Small Cap (OAKEX) or concocting fund portfolios I would be hard-pressed to duplicate on my own, the fund industry has established a level of sophistication that begs notice even from the ranks that kicked the fund habit cycles ago.
With this week's launch of our Motley Fool Champion Funds, I'm reminded that the muck of underperformance and scandal is often a smokescreen to some truly worthy mutual funds. Here are three funds that take a distinctive stance towards pooling the money of shareowners.
Gateway Fund (GATEX) -- Selling covered calls is a seemingly conservative strategy that can be daunting for the individual investor. In comes Gateway. No relation to Gateway (NYSE:GTW) the box maker, the fund simply buys all 500 stocks in the S&P 500 index then sells call options on the index itself. So it locks in that income. While that comes at the expense of any significant short-term gains if the stocks appreciate quickly, selling the options gives the fund a built-in mattress during down markets and well-oiled finesse during steadier times.
Prudent Bear (BEARX) -- Nervous about the market? Think that tech stars like Yahoo! (NASDAQ:YHOO) and Amazon (NASDAQ:AMZN) have outstayed their bullish welcome? Prudent Bear would agree. Taking a doom-and-gloom approach, the fund will short highfliers while loading up on gold stocks and government bonds. Yes, it lost 10% last year, but that's the point. It's built for the rainy days. Actually, shedding 10% isn't too bad considering a market in which secondary stocks shot up better than 50%.
Merger Fund (MERFX) -- Arbitrage is that rare anomaly in that it is a conservative investing philosophy yet not for the faint of heart. When a company announces an acquisition, the deal can take a few months to close. Given that uncertainty, the stock of the company to be bought out often trades at a small discount to the buyout price. Arbitrageurs will buy shares of the discounted company while shorting the acquirer -- to lock in the difference. You're welcome to try this at home, but the price of going for the bunt single is costly if the deal falls apart and you're smacked from the short and long ends of your trades.
That's why Merger Fund rocks. By buying into various deals, and doing so only after its experienced managers conclude that the deal is likely to close -- and close quickly -- the fund shields investors somewhat from the deal blowups that invariably happen. What you ultimately get is a low-risk all-weather mutual fund that does not move in step with the market.
Whether you're a seasoned investor or just looking to get started with funds, you'll want to take a free trial of Motley Fool Champion Funds. Just click here.
Longtime Fool contributor Rick Munarriz remembers the days when funds named Ultra were really, really cool. He is invested in Oakmark International Small Cap and sometimes uses Merger Fund as an aggressive parking space but he does not own shares in any other company mentioned in this story.
