ManagingMoney: Hello and Welcome to the ManagingMoney.com Interview Series. My name is Mike Diersen and I’ll be your moderator today. Our mission at ManagingMoney.com is to help you, our readers, listeners, and viewers to Save Money, Make Money, and better organize your Financial Lives. To that end, our interviewee today falls into the Make Money category. We are very pleased to have with us Jim King, the Director of Portfolio Management from Rydex Investments. Jim, welcome to ManagingMoney.com.

Rydex: Thanks for having me. It’s great to be here.

ManagingMoney: Jim, before we get into the hard questions, I’d like our listeners and readers to know a little bit more about you and Rydex. As I understand it, in addition to being the Director of Portfolio Management, you are also yourself a Senior Portfolio Manager responsible for a team of managers and analysts who manage all of the Rydex leveraged and inverse funds.

Rydex: That’s correct. Actually all the funds that we have are team managed. And so most of the members on the portfolio management team do report in to me. Under my umbrella, as you mentioned, are most of the funds for which we’re best known which are the leveraged index funds and the short index funds.

ManagingMoney: Very good. Now Rydex has been in business for over a decade, has over 51 mutual funds with 13 billion under management according to your website and you’ve been with the company for 8 years now. Correct?

Rydex: Actually about 9.

ManagingMoney: Actually about 9 years now. Alright presumably you’re pretty familiar with the Rydex story. We were wondering if you could give us a little bit of background as far as the history of Rydex and in particular what you consider to be some of Rydex’ core strengths.

Rydex: Sure. Actually the company was founded in 1993 by a gentleman named Skip Vera who unfortunately passed away 2 years ago.

ManagingMoney: I’m sorry.

Rydex: However, the company lives on and the dream lives on as well. He actually saw a niche that was not being filled at all in the market place and that’s how Rydex was born. At a previous employer he noticed that a lot of the more of the active, you know shareholders and money managers, in their mutual funds were getting kicked out because they were trading too much. He thought to himself, “Well, what if we were to build the portfolios to accommodate that sort of trading then we wouldn’t have to kick anybody out and it will be win-win both for the shareholders and for the company”.
His employer at the time didn’t like the idea. So he said, “Fine, I’m going to go out and do it on my own”. And the rest is history. He went ahead and got started building funds. Most of them sort of “indexy” funds, but Funds that were built to allow the type of trading that a more active investor requires without being disruptive to the fund itself.

ManagingMoney: So Rydex is the more active manager as opposed to a passive manager in that you’re constantly looking for what you perceive to be the best areas of value, etc?

Rydex: Well it’s actually our shareholders who are really the active ones. We do have some funds which are more active but our real bread and butter is the leveraged funds and the short funds where the fund always takes exactly the same stance. But shareholders can implement their views by getting in and out.

ManagingMoney: Alright I understand. So actually the shareholder. As opposed to many of the funds nowadays with very extreme switching policies etc., the Rydex portfolios might be a little bit better geared toward the investor who is out there calling their own shots. Is that right?

Rydex: That’s right. That’s right. We like to think we cater to a little more sophisticated investor. So we do have a higher minimum for initial investment. But because the investor has a model of their own we’re not going to be second guessing them by tinkering with the funds.

ManagingMoney: Alright, now speaking of sophisticated investors, I know that one of the areas that Rydex has been an innovator and has some strength in are the ETF’s, or Exchange Traded Funds. And ETF’s, I guess, have become quite popular in the last couple years and I was wondering if you might maybe touch on why you think ETF’s are growing in popularity like they are, and then secondly what are some of the ETF vehicles that Rydex has available, and how might investors use those in structuring their portfolio.

Rydex: Sure. ETF’s have gained quite a bit of popularity especially in the last couple of years. ETF, of course, stands for Exchange Traded Fund which essentially is not unlike a mutual fund except that it trades like a stock on an Exchange. So where as with the traditional mutual fund you typically would buy or sell it just once during the day at the closing price, ETF’s trade all day long and there is an active market. You can buy it and sell it to your heart’s content. Of course you’re going to pay your broker every time.

ManagingMoney: Of course.

Rydex: So on an all in basis it might tend to be more expensive for a very active trader. However, it also tends to boast a lower expense ratio than most mutual funds. So there is certainly some trade offs there but the ETF market place is growing very rapidly and there is a number of strategies in certain ETF’s that you don’t find in too many mutual funds.

ManagingMoney: And could you touch on a couple of those?

Rydex: Sure. One of our newest offerings in the ETF’s space is the Euro currency shares which is actually an ETF and within the ETF it just owns the Euro.

ManagingMoney: OK

Rydex: So if the Euro is appreciating versus the US dollar then the Euro currency shares, ticker symbol FXE, will go up. If the Euro is depreciating against the dollar then of course the FXE will go down. So that is really the first of its kind -- ETF that actually has currency wrapped up inside of it rather than typical equities.

ManagingMoney: Yes, because it’s actually difficult for the average investor out there to get access to the currency markets without maybe employing, you know, futures exchanges, etc. Correct?

Rydex: Exactly. You need to use futures probably and then of course you find yourself subject to margin requirements and margin calls and you really need to stay on top of it. Also the minimum investment for doing that is quite a bit for a lot of smaller investors, whereas with ETFs you can get in at a much lower dollar value.

ManagingMoney: Well now, you said something a second ago. You mentioned margin calls and that gets into the second area of your fund family that I would like to talk about. And I think probably one of the areas where you have got the most expertise in are in your short mutual funds and leveraged mutual funds. Now traditionally, I think, you probably agree that most investors would like to use those strategies but they may be intimidated by some of the risks involved or not feel that they have the particular expertise themselves. So how can Rydex then help someone who is wanting to either be short or be market neutral and maybe use leverage, etc?

Rydex: Sure. First I guess let me explain exactly what we are talking about when we say short and leveraged mutual funds. The best example of a short fund is our Ursa fund which latin scholars will know is the latin word for bear. So this is a fund which allows the person to take a bearish stance on the market. Each and every day for every percent that the S&P 500 goes up the Ursa fund will actually go down by 1%. And vice verse if the market is down a % then the fund will be up a %. So that is all we mean by a short fund or sometimes open inverse fund. It’s the opposite direction of the market. A leveraged fund on the other hand, which can be long or short, but a leveraged fund actually performs at some multiple of the market. So actually our very first fund was our Nova fund. That is leveraged 150% to the S&P 500. So, numerically each day that the S&P 500 goes up 1%, Nova will go up 1 ½. Of course, it also works the same way on the down side. A 1% decline in the S%P would be 1 ½ % decline in Nova.

ManagingMoney: But investors aren’t going to get a margin call right?

Rydex: That’s correct. The margin calls here. You basically buy the funds just like any other. Your losses are limited to what you put in just like any other fund. However, if you’ve got a strong feeling on the market, this is a way to take a leveraged position without going through all of the paperwork of a margin account. Or alternatively, this is the way to get the same amount of exposure that you otherwise would by putting up less money. You only need to put up 2/3 as much money in Nova to get the same amount of exposure. Which is a handy tool because then you can do other things with that cash.

ManagingMoney: And then Rydex on your end I presume that you are employing some sophisticated risk management tools to make sure you’re not over-leveraged or anything like that.

Rydex: Yes. As “40 Act” mutual funds, which these are, we certainly have plenty of regulatory constraints placed on us. First and foremost you can’t lose more money than you put in. So we actually have some, as you mentioned, fairly sophisticated options in there to protect us and some other strategies as well that will kick in and keep the fund from going below zero if something really nasty were to happen in the market. Or alternatively, if the market were to melt up rather than melting down we also need to protect short funds from going to zero. Which isn’t something you’d necessarily think of intuitively but there is just as much risk there that the market would double in a day perhaps and wipe you out on one of the short funds.

ManagingMoney: Now we’ve talked about some of Rydex’s, in some ways, esoteric offerings but Rydex also has a lot of traditional mutual funds. In particularly you have some expertise in the sector funds area. Correct?

Rydex: Absolutely. We offer 17 sector funds and thankfully the names are fairly self explanatory -- anything from our Financial Services Fund, or our Banking Fund, or our Electronics Fund. And just like the other Rydex funds, you don’t have to stay in them for more than a day. For active traders who maybe change their minds frequently on what sector they like are certainly welcome to do so.

ManagingMoney: Alright. Now I probably would be remiss, Jim, if I didn’t try to get some sort of market call from you. Now of course I understand you have to be careful about what you say, but now, for example, one of your sector funds you have are Real Estate funds. Correct?

Rydex: Yes, we do. We have a fund that invests entirely in REITs.

ManagingMoney: OK. Now REITs, of course, have been quite popular and a lot of money has been made in the real estate market. But we are also starting to hear some rumblings out there that maybe the real estate market has now topped out. And I was curious does Rydex have an opinion, for example, as far as whether there is still some value in the REIT market? Or are you starting to be a little bit more defensive in your posture now?

Rydex: Now, one of the nice things about working at Rydex is because we have funds that work both ways, the long side and the short side. We can almost get away with not having an opinion on the market and bringing that to our shareholders. Although rather than say nothing, a lot of times we like to sort of present both sides of the argument. I think that the argument has been well made that real estate, or that REITs in particular, may have gotten a little bit ahead of themselves. However, I think it’s important to note that when we’re talking about our real estate fund it is REITs rather than residential real estate.

ManagingMoney: Alright.

Rydex: And so I think that most of the risks that have been identified might be in residential real estate rather than office properties and apartment buildings which are typically REITs.

ManagingMoney: I understand.

Rydex: You could also almost make the argument, and I think in some places in the country you can, that a weaker housing market actually helps out apartment managers.

ManagingMoney: Makes sense.

Rydex: You know, so because if people get spooked about buying houses they may decide to rent a little while longer before they go ahead and take the plunge. In which case that would actually help to buoy the REIT market a little bit. Because again we are talking about a lot of apartment REITs as well as office REITs or even things as out of the mainstream as timber REITs where you are basically are buying a large swath of land to cut down the trees one day.

ManagingMoney: OK. Anything new on the horizon that you can talk about? Again, I’m not sure just exactly what you can say but I know Rydex is an innovator and is there anything in closing here shortly that you’d like our listeners to know about that is on the horizon?

Rydex: Yes. We always seem to have something in registration that is coming up which generally I’m not able to talk about. But one of our newer offerings that came out very recently is actually a series of 6 more ETF’s which we have had a lot of interest in. These 6 ETF’s actually attempt to track various style boxes. We‘ve got both value and growth in each of the 3 market capitalizations: large, medium, & small for 6 funds total. They are a little bit different than the other style box offerings out there because they’re benchmarked to the new S&P pure style indices. So rather than being market capitalization weighted they actually get a style score and they’re weighted on that score. So, for instance, in the large cap growth the “growthiest company”, if that’s a word, will have the highest weighting. In value the “valueiest company”, which I’m pretty sure is not a word, will get the highest weighting there. So it’s actually, again rather than market cap, it’s actually being weighted toward value or growth which is an approach that I don’t think any other ETF’s have taken before. We’re very excited about those products.

ManagingMoney: We appreciate the heads up on that. Jim we’re going to have to conclude the interview for now. We want to remind our users that they can find out more about your products and services at www.rydexinvestments.com. Also, they can find a transcript of this entire interview at www.ManagingMoney.com/weblog or by visiting the ManagingMoney.com Education Center. As always, we want to remind our users to consult with their Financial Advisors, if appropriate, before making any specific investments. And in closing from ManagingMoney.com we hope you Save Money and Make Money in 2006! Jim, thank you very much for your time.

Rydex: Thank you. I would love to come back sometime.

ManagingMoney: Very good. Bye.