Rydex Juno Fund Has Best Month on Bet Against Bonds (Update3)

2003-08-12 13:04 (New York)

(Adds details on the fund's description in the eighth

paragraph.)

Aug. 12 (Bloomberg) -- U.S. Treasury bonds had their worst

month in July since Jimmy Carter was president. For investors in

the $634 million Rydex Juno Fund, the market's pain was their

gain.

The fund bets against bonds by ``shorting'' them -- selling

borrowed securities in the expectation that they can buy them back

more cheaply. The Rockville, Maryland-based fund had its best

month since opening eight years ago, gaining 12.26 percent. Bonds,

as measured by the Lehman Brothers Aggregate U.S. Treasury Index,

lost 4.39 percent, the worst month since February 1980.

The fund is designed ``not so much to take a gamble, but to

mitigate the risk in a bond portfolio,'' Chuck Tennes, 50,

director of portfolio management at Rydex Global Advisors, said in

an interview.

Bond prices plunged in July on signs the U.S. economy might

be gathering enough strength to re-ignite inflation. That boosted

the Rydex Juno fund, which was hurt during the bull market, losing

16.7 percent last year while the 30-year bond's price gained 10.3

percent, according to a Merrill Lynch & Co. index.

In July, Pimco's $72.7 billion Total Return Fund, the world's

biggest bond mutual fund, managed by Bill Gross, lost 4 percent,

its worst month since the fund opened in 1987.

Rydex Juno and other funds at the firm are mostly index-

tracking and seek to provide results based on a particular

benchmark. Some of the funds use borrowed money or derivatives to

magnify their returns.

The Rydex Titan 500 Fund aims to return twice as much as the

Standard & Poor's 500 Index. The Tempest 500 fund seeks to move in

the opposite direction of the U.S. benchmark, rising when it

falls.

Opposite Moves

Juno tries to do the opposite of the price of the U.S.

Treasury's 30-year bond, the longest maturity government security

whose value is among the most sensitive to changes in interest

rates. It is the only fund with at least $50 million in assets

that shorts the Treasury market, according to Bloomberg data. The

minimum investment to open a Juno account is $25,000.

In 1999, when the 30-year bond lost 19.9 percent, Juno gained

20.4 percent. During the past three years, as the 30-year bond

price returned 1.91 percent a year, the Juno fund lost 6.22

percent a year on average.

The fund's portfolio included sales of $175 million of

borrowed Treasury bonds as of the end of March. If the price of

the bonds declines, the fund will be able to repay its borrowed

bonds with lower priced securities, keeping the difference as its

profit. If bond prices rise, covering the borrowed bonds will

generate a loss for the fund.

As of March 31, the fund invested proceeds from the short

sales plus other assets in bonds issued by Fannie Mae, the Federal

Home Loan Bank and the World Bank along with some shorter-term

securities known as repurchase agreements.

`Insurance Policy'

Jim Boucher, a portfolio manager at SDR Capital Management in

San Francisco, has been using Juno to reduce the damage done by

rising rates in the fixed-income accounts of more than two dozen

of his clients. Customers wanted to keep their bond investments to

counter risks from their stock holdings, he said.

``You can look at it as an insurance policy,'' Boucher said.

``When rates were close to a 50-year low a couple of months ago,

we were concerned that bonds were overpriced so we used Juno.''

The amount invested in the fund varied based on each client's

specific needs. About 5 percent of the bond portion of an account

was typical, he said.

Not all financial advisers think Juno is a useful tool for

individual investors.

Glenn Frank, an adviser at Tanager Financial Services in

Waltham, Massachusetts, said he is wary of the fund's fee -- 1.41

percent of the total invested -- and advises clients not to try

and guess where interest rates are headed. A Bloomberg index of 20

government bond funds had an average expense of 0.83 percent.

``Rates rose -- who said anything about rising more,'' said

Frank, who teaches investment classes at Bentley College in

Waltham. ``I have no idea where they're going and I would run away

from anyone who says they know.''

So far in August, the 30-year bond has gained about 1.63

percent and Rydex Juno has lost 1.72 percent. ``Past performance

doesn't indicate future results,'' Rydex's Tennes said. ``We don't

know what will happen next month.''

--Aaron Pressman in the Boston newsroom (617) 338-5822 or

apressman@Bloomberg.net. Editor: Quinson, Jefferson, Dunn.