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Special Report: Strategies for Volatile Markets | RISK

Several Suggestions for Bargain Hunters Ready to Shop


As the world's financial markets have shuddered in the last several weeks, individual investors have been treated to a pair of new experiences.

One is that many newcomers to the stock and other securities markets have lost money--at least on paper--for the first time. The second, however, is that they're also probably eyeing some of the juiciest bargains they've ever seen.

"This is a time to be buying if you have excess cash available for the long term," said Sheldon Jacobs, editor of the No-Load Fund Investor newsletter in Irvington, N.Y.

Indeed, for aggressive investors willing to assume risk, potentially lucrative opportunities may exist today not only in stocks but also in such areas as emerging-market bonds and real estate investment trusts, experts say.

Of course, no one knows how deep or long-lasting the world's financial troubles will be. If the U.S. economy is dragged into recession by the economic conditions afflicting Asia and Russia, U.S. investors are almost certain to face more losses.

Certainly, investors shouldn't dump all their available cash into trouble spots, experts say. But those who have confidence in the U.S. economy and are unfazed by doomsday predictions may want to identify attractive areas and begin nibbling at them.

The easiest way for many investors to take advantage of the opportunities is through mutual funds. For that reason, The Times asked experts to pick funds in various market sectors they believe could provide sizable returns in the next two to three years.

Here are some ideas in four sectors:

Small-Cap Stocks

In the stock market, there's almost universal agreement that the best value is in small-company stocks, which have been battered terribly.

That doesn't mean small-capitalization stocks will go up soon. They've been inexpensive compared with larger issues for several years, but investors have still flocked to the larger stocks because of their supposedly steadier earnings and greater liquidity.

And many experts believe small stocks will continue to lag until big stocks finally collapse and a full-blown bear market occurs.

Their reasoning: If the market stabilizes, investors will continue to favor large caps. But if large caps finally give way, all stocks will be in a bear market. Small stocks, then, will only recover once the bear market is over and a new bull market begins.

Nevertheless, small-cap valuations have become so attractive that investors may want to begin establishing their positions now, some experts say, even if small stocks have further to fall.

The Russell 2,000 index of smaller stocks is down almost 21% this year and has gained a meager 39.6% cumulatively in the last five years. That compares with 111% over the last five years for the blue-chip Standard & Poor's 500 index.

If you can look out two to three years, it's not inconceivable that small stocks could provide returns of 50% or better from these levels. Once they start to rally, their gains often are dramatic--and happen like lightning.

It's hard to say which of the two broad sectors of small-capitalization equity funds, value and growth, is in worse shape today.

Growth funds, which aim to buy fast-growing companies even at rich prices, have lagged badly for several years and are down an average of 22.5% this year through August, according to fund tracker Morningstar Inc.

But value funds, which seek undervalued stocks, have fared little better, losing 19.6% this year. Many are top-heavy in financial and cyclical issues that have suffered because of concerns about the U.S. economy.

Among small-cap value funds, Christine Benz, a Morningstar equity analyst, recommends Pimco Micro Cap Growth (phone: [800] 927-4648; year-to-date total return: -12.3%), Berger Small Cap Value ([800] 333-1001; return: -15.3%), and Scudder Small Company Value ([800] 225-2470; return: -14.4%).

The Pimco fund is aimed at institutions, but individuals can buy it through so-called fund supermarkets run by discount brokers such as Jack White & Co.

The Berger fund has been extremely consistent, Benz said, and the Scudder offering is a promising new fund. A so-called quant fund, which relies heavily on computer-aided number-crunching to choose its stocks, Scudder's fund is less than 3 years old. But on a monthly basis, it has trailed its peer group only a few times.

As for growth stock funds, Benz likes Franklin Small Cap Growth ([800] 342-5236; return: -23.3%) and Robertson Stephens Emerging Growth ([800] 766-3863; return: -11%). The latter is a "real pedal-to-the-metal fund" that buys stocks with high valuations and has been heavily invested in Internet stocks.

Emerging Market Bonds

Few mutual fund classes have been hurt as badly as developing-country debt funds. The J.P. Morgan emerging markets bond index is down almost 28% this year and the funds themselves are down an average of 37%.

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