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A fund soars with Nasdaq 100
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June 2, 1999: 12:14 p.m. ET
Manager of Rydex OTC Fund nips and tucks Wall Street's big technology names
By staff writer Martine Costello
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NEW YORK (CNNfn) - Mutual fund manager Michael Byrum has been riding the wave of the Nasdaq 100 Index for five years.
But Byrum, manager of the Rydex OTC Fund, isn't content to sit back and simply mirror the soaring benchmark. Rather, he tweaks his portfolio, adding weight here and cutting exposure there, to deliver returns at the top of performance charts.
"We try to stay slightly ahead of the index," said Byrum, vice president of investments at Rydex Funds and senior portfolio manager.
The index includes market heavyweights such as Microsoft (MSFT), Intel (INTC), Cisco Systems (CSCO), MCI WorldCom (WCOM) and Dell Computer (DELL).
Not plain vanilla
The fund, with $1.2 billion in assets, earned five out of five stars for risk-adjusted returns at fund-researcher Morningstar, putting it in the top 10 percent of funds in its category. It is up 10.25 percent year-to-date as of Tuesday, and earned 86.48 percent in 1998; 21.85 percent in 1997, 43.42 percent in 1996 and 44.24 percent in 1995.
But it is far from a plain vanilla mutual fund. For one, it has a steep minimum initial investment of $25,000. (You can cut that amount to $15,000 through an investment advisor; or $2,500 if you have a brokerage account with Fidelity, Charles Schwab or Jack White & Co.).
It also uses derivatives like Nasdaq 100 futures contracts, where you bet on which way a stock will move to hedge your downside risk. Byrum insists he doesn't use derivatives to enhance returns -- he uses the contracts as a way to get cash in and out of the market quickly.
"We'll take a portion of the assets and add value through a number of strategies," Byrum said.
Byrum, the father of a three-month-old daughter, is an affable man who is shy about revealing his age and details of some of his strategies. A native Ohioan who graduated from Miami University of Ohio, he joined Rydex when the company started rolling out mutual funds in 1993.
The Rydex OTC Fund was the first to track the Nasdaq 100 index, he said.
"There's no way we would have predicted how well the index would do," Byrum said.
Byrum tailors the index
While Byrum tries to be faithful to the index, he owns only 86 of the 100 stocks. In April, the fund held 76 stocks.
The fund has 15.37 percent of its portfolio in Microsoft. Byrum hasn't overweighted the stock because of uncertainty about the government's antitrust case against the company.
"There's not as much incentive for me as a portfolio manager to overemphasize or overweight Microsoft, given the uncertainty," he said. "In the past, I've been more excited about Microsoft's prospects."
Likewise, he's slightly overweighted Intel and MCI WorldCom. But he's underweighted some Internet names.
"A lot of Internet stocks have come into the index as recently as last week," Byrum said. "My first charge of this fund is to match the index. I'm not going to want to ignore At Home (ATHM) or CMGI (CMGI) or CNET (CNET). I might not have a full weighting, but they contribute to the index's performance."
Amazon.com (AMZN), which joined the index in December, represents 1.36 percent of the portfolio, according to information on the fund's Web site. Yahoo! (YHOO) represents 1.50 percent.
"Everybody talks about the 'Internet bubble,' but I'm more concerned about getting in at a reasonable level," Byrum said. He also has to decide how to get into a stock when the index adds new names -- slowly or all at once, for example.
When he decides to eliminate a Nasdaq 100 stock from his portfolio, Byrum considers the company's weighting and its contribution to the performance of the index.
About 2 percent of the portfolio are Nasdaq 100 futures contracts, so if Byrum gets an infusion of cash he can get it invested quickly instead of doing a more time-consuming program trade of 86 stocks. He keeps about 0.5 percent in cash.
He acknowledges that some investors in his fund are market-timers -- short-term investors who move rapidly in and out of funds and stocks -- but he said they are a minority.
"This fund has been more rewarding for people who have a long-term strategic focus," Byrum said. "You can't jump in and out of the market every time the wind blows.'
Some doubters
Despite stellar returns, however, the fund's investing style has its critics.
"It's a fairly risky fund, but if you want to buy the stocks of the Nasdaq 100, that's a way to do it," said Sheldon Jacob, editor of the newsletter No-Load Investor.
Kevin McDevitt, an analyst at Morningstar, said despite the fund's five-star rating, he wouldn't recommend it because it is so highly concentrated in a few top names of the index. Even for the most aggressive investors, he would recommend no more than 10 to 15 percent of their portfolios be devoted to the fund.
"It's a huge bet on technology," McDevitt said. "It's done very well. But as well as it can do on the upside, it can do just as poorly on the downside."
There are two other funds that track the Nasdaq 100, the Potomac OTC Plus Fund and the UltraOTC Fund, McDevitt said. Both of these funds have performed better than the Rydex fund since 1998 by using leverage to boost returns, he said.
"They're insane with volatility," McDevitt said of the other two funds. "If you're going to do it (invest in a fund that tracks the Nasdaq 100), the Rydex fund is the safest way to go."
Despite the risks, McDevitt thinks there will be more funds debuting like the Rydex OTC Fund.
Byrum acknowledged the fund had outflows in recent months that peaked at about $150 million.
Byrum said he's cautious about the market in the short term, and thinks an interest rate hike is possible. But in the long term he remains a dedicated bull, and he is optimistic about the fund.
"I think investors need to be patient, and the people who have been patient, using the OTC fund as a long-term holding, have been rewarded." 
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