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Lehman, AIG, Merrill: Which Funds Are Most Affected?

The top holders of the headline-making financials firms.

Karen Dolan, 09/23/2008

Hurricane Ike strikes Texas, record rainfall drenches the country's midsection, and a commuter train crash kills people in California. Oh, and another major financial institution collapsed, AIG AIG needs more capital and Bank of America BAC is buying Merrill Lynch MER. Yes, it was a busy weekend--one full of bad news.

If you own a mutual fund, you're probably wondering how the latest financial sector developments affect your investments. While the latest developments underscore the severity of the problems facing financials, there's also a lot of noise and fear in the market. We think sticking with a long-term financial plan and remaining patient amid this storm is the best course of action (or nonaction). Even so, there are some funds that are more exposed than others, so we've tried to isolate funds most affected below.

Big Holders of Lehman Brothers
Stockholders of Lehman Brothers LEH are hurting the most. The stock, which traded as high as $62 within the last year, is now down to pennies on news that it has filed for bankruptcy. The table on the next page shows which funds had the most concentrated exposure to Lehman as a percentage of their assets.PAGEBREAK

As the table shows, the more meaningful damage was contained to funds that specialize in the financial sector. Legg Mason Partners Aggressive Growth SHRAX held the most significant position by a diversified fund. That fund, managed by Richard Freeman, owned 1.7% of the company's outstanding shares as of June 30, 2008.  The fund's stake dated back to 1995 and Freeman had been hanging onto Lehman, saying the company has gone through other hardships and managed them well. He also pointed to its strong franchises and investment banking business. We still like the fund and think Freeman is a talented investor, but Lehman will go down as a mistake for him. Even so, Freeman has had plenty of stock-picking wins over the years to give us confidence in his approach. Moreover, Lehman made up 3.2% of the fund's assets, so the impact will be limited to roughly that amount.

 Big Lehman Holders


% Exposure
Fidelity Sel Brokerage & Inv FSLBX
Morgan Stanley Fin Svs B FSVBX
Legg Mason Partners Ag Gr A SHRAX
Lg Growth
API Efficient Frontier Value C (YCVTX)
Ehrenkrantz Growth (EKNGX)
Lg Blend
ING Legg Mason Partners Ag Gr I IMEIX
Lg Growth
Saratoga Large Cap Value I (SLCVX)
Lg Value
Oppenheimer Quest Balanced* QVGIX
Mod Alloc
Osprey Conc Lg Cap Val Eq Instl
Lg Val
Pioneer Select Growth A (PSEFX)
Lg Growth
Data is as of the most publicly available portfolios. * Oppenheimer has told us that Quest Balanced's position in Lehman Brothers was 0.45% of assets at the end of August.

When we took a broader view to see which fund families as a whole have the most exposure to Lehman stock we found the impact on fund families to be pretty benign. Vanguard topped the list in terms of absolute dollars invested, but none of its funds individually had too large a bet.PAGEBREAK

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