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Rydex on a Wild Ride in '98

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Rydex is proof that smaller index fund groups can still thrive. Securities Data Publishing rated it the fastest growing fund family in 1998, during which time it grew from $1.7 Billion to $4.1 Billion under management. It achieved this by bringing out creative, flexible products to give indexers a variety of ways to play large cap markets.

"We are the only firm out there that identifies with and is appropriate for all four basic investment disciplines: market timing, tactical asset allocation, strategic asset allocation, and sector rotation," said Rob Steele, vice president for marketing and product development. Rydex is used by 600 registered investment advisors as well as institutional and retail investors.

Rydex leaves the plain vanilla index fund to others, preferring to concentrate on a variety of innovative twists to indexing. Founded in July of 1993, Rydex began with the Nova Fund, an S&P fund with beta of 1.5 (or 150% participation) that gave market timers the opportunity to leverage a bull market easily. "We cut our teeth on market timers," said Steele.

Since then the firm has come out with a total of 22 funds. They include the Ursa Fund, which provides the inverse of the S&P 500 for true bears, and the U.S. Government Bond Fund, which gives investors 120% participation in Long Treasury Bonds,

The firm's funds can handle frequent trades because it does not only take simple long positions in indexes. Commonly it will add future contracts to give it flexibility. In the OTC Fund, for instance, it buys a basket of stocks representative of the Nasdaq 100 and overlays a variety of option contracts. Naturally it also offers an inverse Nasdaq 100 fund, the Arktos Fund.

"We will provide an index based approach, but if you buy a product from us, you can trade it," said Steele. About 20% of his advisors clientele are "twitchy", that is, they trade over 15 times a year for their investors.

In addition, there are 14 capitalization weighted sector funds. Each requires a minimum capitalization and liquidity. In addition, top stocks are underweighted slightly if Rydex management feels they are dominating the index.

"Microsoft does well and money flows to Microsoft. Microsoft does well and its index does well. People see the index do well so they invest in it. Then more money flows to Microsoft. It goes around and around. Normally Microsoft would be such a huge component [of the technology sector fund] we had to manually pare that down," he said.

Finally, stocks that correlate poorly with the others are removed, so that the result is a basket of stocks that move in tandem within their sector, giving a more "pure" play.

"The money manager knows that if he is buying banking he is buying large cap weighted stocks that act like banks," he said.

Holdings are updated and published every week, so investors know what they are getting at all times.

Steele sees the bull market causing certain types of investors to revise their practices. For instance, market timers have all but given up hope on waiting for the bear market and are now increasingly rotating from sector to sector.

"Sector rotation is one of those all weather approaches," he said. "There is always something going on in a sector."

In addition, strategic asset allocators are becoming somewhat more tactical. "I see a lot of frustrated strategic asset allocators out there," he said. "Some of them are thinking of throwing in the towel to play a little catch up. Some of them are considering increasing their exposure to large growth."

Although value will bounce back, said Steele, for the moment growth still seems to have the momentum. "It's almost a self-perpetuating process," he said. "Most managers would prefer to have 20% cash at this point, but many say 'I can't afford it because I have to keep up with the Joneses down the street' and they are fully invested."

The company is not stopping here. It has 8 more funds on the drawing table and should come out with several new ones this year.

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