Bill Seale, a principal and director of portfolios at ProFund Advisors of Bethesda, Md., has more than 30 years of experience in financial services. At one point in Seale's career, he was appointed commissioner of the U.S. Commodity Futures Trading Commission by then President Ronald Reagan. Seale oversees the management team in charge of ProFunds' 74 specialty bull and bear index funds, two money market funds and 22 variable insurance products, with a total of $2.5 billion under management. The firm's bear funds have the dubious distinction of being some of the best-performing funds so far this year. MFMN Associate Editor Chris Frankie recently interviewed Seale.
MFMN: What's the rationale for your bear market fund? After all, owning a bear market fund over the long term has got to be a losing strategy since stocks have always risen over long periods of time.
Seale: This kind of product is not a strategic investment. It's a tactical tool. If you put your money in the bear fund and you just leave it there for the long haul, you're not going to have a whole lot of money left.
It's a tactical tool that allows you to do two things. The first is that it can earn a return as a market goes down. We have funds up probably 70% to 80% year-to-date. You can also use a bear fund to offset the losses in a long portfolio as the market goes down, or essentially as a hitching type of a tool.
MFMN: Explain your fund's overall strategy.
Seale: The strategy of the fund is simply that we short the market. For our bear fund, if the S&P is down 1% today, the fund will be up 1%. The Ultra Bear does twice the inverse of the market. So, if the S&P 500 is down 1%, the fund will be up 2%. The fund is re-balanced every day at four o'clock.
MFMN: What's the basic strategy of the Ultra Bear fund? What's it mostly comprised of?
Seale: It's a fairly straightforward position. The way that we do it at ProFund is we essentially use only futures contracts in almost all of them. But we would typically try to do it with a combination of short futures contracts and short total-return swap agreements.
We do not sell securities in our portfolios nor use the options strategy, that is, the puts/call combo, because we don't think they're that efficient. We think it's an expensive way to go about creating short exposure.
However, you can use several different things to run this kind of index bear fund. One thing you can do is you can sell short securities. Another thing you can do is sell futures contracts or short swaps agreements. And the fourth thing you can do is you can use a put/call combo.
MFMN: If your investors put $10,000 in the Ultra Bear Fund in 97, they would have only had a net profit of $379. So, what's the sense in offering a fund like this in a bull market?
Seale: You can't look at it as a buy-and-hold investment. We've moved away from the world where you buy something and you hold onto it forever, and when you die and give it to your kids, they hold onto it forever.
Every investor needs to have an investment plan, which needs three components to it.
The plan needs to have an idea of what to buy and how to get into the position. The second thing is a strategy for re-balancing. And the third, which is very important with bear funds, particularly, is that you have to have a pain threshold. You have to have some idea of when you are going to get out of this position if you are wrong.
MFMN: So obviously there is no ideal timetable in which to invest in the Bear Funds. It should be primarily dictated by the market's movement.
Seale: You have to be cognizant of what's going on in the market and you have to be prepared to move into the fund as the market goes down, and you obviously need to be prepared to move out of the fund as the market goes back up.
MFMN: A lot of folks are predicting an economic rebound next year, saying the market's excesses have been rung out. Will this cause the ProFund Ultra Bear fund to go into hibernation?
Seale: It'll start going down. We make no effort to truncate the loss in any fund if the market goes against the fund. We're pure indexers. If the market were to rebound, what will happen is the fund will begin to fall, and as the market continues to rebound it would continue to fall and fall.
MFMN: How does it feel to run one of the best-performing funds of the past year, and yet, have, within your same complex, the ProFund OTC Fund, which is one of the biggest losers?
Seale: You're not the first person to ask that question. If you look at Ultra OTC and you were to look at the years 1998 and 1999, the fund had the best two-year run ever of mutual funds - up 800% over two years. And at the same time, we're running the Ultra Short OTC fund, which I'm guessing had probably the worst track record because it was essentially an inverse of the Ultra OTC fund.
We have short funds, and they are doing really well. We've had long funds, and they've done really well. We're indexers; we don't have a view of the market here in the house. We simply create tools for investors, and we don't tell you how to use the tools. We want every one of our funds to do exactly what it's supposed to do, every day.
We have 76 funds. We have two money markets and 74 index funds. Of those 74, there's 70 equity types of index funds and four bond funds.
If you look at a fund and say, "Our bear funds are up, gee isn't that great?" My answer is that, no, it's not great because it's not good for the economy. We are all, by our very nature, all of us at ProFunds, bulls. We believe the market will be up in the long run, and we want it to be up in the long run. I'm like everyone else: My retirement's in the market.
MFMN: Have assets under management in your fund skyrocketed?
Seale: We have been very, very stable at about $2.5 billion for quite some time. If you look at ProFunds five years ago, we were at zero. Eighteen months out we went from $1 billion, to ultimately $3.4 billion in March 2000. We think we've done a wonderful job because of the fact that the assets have been stable in a very difficult market.
MFMN: What numbers or factors do you look at, or what philosophy do you hold, that sets your bear fund apart from your competitors?
Seale: We're pure indexers. The markets's going to go up, the bear fund is going to go down, and we make no effort to truncate the loss because that's not what we do. It's an inverse index fund.
We run our bull funds exactly the same way. If the market's up, the fund's up. If the market is down, we make no effort to truncate the loss. So, because of the fact that we're pure indexers, we're different in some respects than other folks that run bear funds.
MFMN: What's your opinion as to how much longer this bear market will last?
Seale: I called for a recovery in the fourth quarter of last year, to show you how out of touch I am. My background is that I'm an economist. I was university professor before ProFunds. There's no way to predict for sure when this is going to be over. I really thought we would have a good year in 2001, and I was wrong. I'm sort of startled like everybody else that the economy's been down for as long as it's been down. This break occurred in March 2000. We're 2-1/2 years into this. I'm not sure if it'll be the fourth quarter of this year or the first or second quarter of next year, but the market's going to turn around.
MFMN: Looking ahead -- what would we expect to see in the coming months from your fund, if we can take anything from historical comparisons?
Seale: I don't think historical comparisons are useful anymore because it seems to me that technology keeps thrusting us into a paradigm that we've never used before.
I always said I think that it will be technology that leads the market out of this. My gut tells me that technology will lead this thing on the way out, but there's nothing to point to, to say the market and the economy did this during a previous period in history. It's gotten to the point where every quarter is unique unto itself.