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Funds with the Most Exposure to Fannie and Freddie

The collapse has cost shareholders--including many funds--billions.

David Kathman, 09/16/2008

The recently announced federal bailout of mortgage giants Fannie Mae FNM and Freddie Mac FRE marks the end of a long process of deterioration stretching back nearly a year. These two government-sponsored enterprises (GSEs) play a crucial role in the U.S. financial system by backing about half of the mortgages issued in the country, so the government has an interest in making sure they don't fail. Until recently they were considered very safe and stable, but the mortgage crisis has strained their balance sheets to the breaking point and forced them to repeatedly raise new capital.

Although the government's bailout plan has given a boost to the bonds issued by Fannie and Freddie, it has devastated the stocks of the two companies. The stocks had each already fallen around 90% this year when the bailout was announced, and afterward they lost most of their remaining value, trading at under $1 a share by the end of the day on Sept. 8. As recently as October 2007, both stocks traded at more than $60 a share.

This collapse has cost billions of dollars in losses for investors, including many mutual funds. Back in December 2007, when the crisis was still in its early stages (as we can see now), we took our first look at the mutual funds with the biggest percentage of their portfolio in Fannie and Freddie. Then in July of this year, when things had deteriorated and the possibility of a government bailout began to seem real, we revisited the issue. Now that the saga has come to an end, mostly, we thought we would take a final look at the funds most affected by the demise of the GSEs.PAGEBREAK

First, we'll take a look at the mutual funds with the biggest combined percentage of their portfolios in Fannie and Freddie. The following table shows the top 10, including each fund's category; the size of its asset base; the percentage of the portfolio in Fannie, Freddie, and the two combined (as of the most recent reported portfolio); and its year-to-date return as of Sept. 9.

 Biggest Combined Fannie Mae and Freddie Mac Holdings
 
Category
Size($Mil) FNM
(%)
FRE
(%)
Total
(%)
YTD
Ret (%)
Fidelity Sel Home Fin FSVLX Financial 111.3 8.75 8.26 17.01 -42.84
Touchstone Lg Cp Val TLCAX Lg Value 24.6 6.22 5.57 11.79 -37.02
Morgan Stan Fin Serv FSVBX Financial 57.2 5.15 4.23 9.37 -36.74
Schneider Val SCMLX Lg Value 228.3 4.65 4.09 8.74 -24.25
Thompson Plumb Gr THPGX Lg Blend 248.2 3.68 2.92 6.61 -23.15
AIM Fin Serv FSFSX Financial 298.5 4.60 1.46 6.06 -23.62
DWS Dreman Con Val LOPEX Lg Value 40.2 3.05 2.88 5.92 -24.72
Harbor Global Val HAGVX Lg Blend 65.2 1.98 2.75 4.73 -20.66
Dreman Cntr Lg Cp Val DRLVX Lg Value 6.5 2.66 2.04 4.69 -20.38
Fidelity Sel Banking FSRBX Financial 265.6 2.81 1.21 4.02 -12.67
FNM, FRE % data as of the funds' most recently reported portfolios. Return data as of 09-09-08.

This is very similar to the July list, except that it reflects more recent portfolios. For seven of these funds, the most recent portfolio is from June 30, while the two Fidelity funds and Dreman Contrarian Large Cap Value DRLVX have July 31 portfolios. (Most of the earlier list was based on March 30 portfolios.) Nine of these funds are the same as in the July list, with Dreman Contrarian Large Cap Value the only newcomer, and eight were among the biggest holders mentioned in our first article back in December. Most of these funds appear to have been hanging on, betting on a turnaround by Fannie and Freddie that never came.

As before, the list consists mainly of financial sector funds and value funds, including two managed by deep-value investing legend David Dreman and a pair managed by the Schneider brothers, John Schneider of Touchstone Large Cap Value TLCAX and Arnie Schneider of Schneider Value SCMLX. These include some funds with pretty good long-term records, but they've all been hammered this year, with the top nine all posting losses of more than 20% for the year to date. All nine of these funds also trail their categories for the year to date, with seven of them ranking in the category's bottom 5%. Fidelity Select Banking FSRBX is the only fund here that's ahead of its category for the year to date, and it may not be a coincidence that the fund's stake in Fannie and Freddie is less than half what it was a few months ago.PAGEBREAK

We also thought it would be interesting to take a broader view, and see which fund families as a whole have the most exposure to Fannie and Freddie stock. The following table shows the top 10 families by that measure, with the total combined asset base of each family's mutual funds and the percentage of those assets in Fannie and Freddie, as of each fund's most recent portfolio.

 Fund Families with Most Exposure to Fannie and Freddie
 
Total Assets ($M)
% in FNM
and FRE
Schneider Funds
342.1
6.50
Thompson Plumb
330.4
5.47
Bhirud
0.3
3.43
Bullfinch
5.7
1.94
Weitz
3,345.5
1.28
Chaconia Funds
13.9
1.24
Monetta
66.3
1.23
Roosevelt
40.2
1.05
Yacktman
284.8
0.86
Dodge & Cox
140,263.1
0.72
FNM, FRE % data as of the funds' most recently reported portfolios.

The two top shops here, Schneider and Thompson Plumb, are boutiques with just a few funds (two for Schneider, three for Thompson Plumb), and in each case, as we just saw, one of those funds is among the top 10 holders of Fannie and Freddie. The list also contains several small boutiques with one or two funds holding positions that are smaller, but enough to stand out in this context. For example, the Bhirud family's one fund, tiny Apex Mid Cap Growth BMCGX, holds both Fannie and Freddie and just missed our top 10, while Chaconia's one fund, Chaconia Income & Growth CHIGX, has smaller positions in both stocks.

The two larger fund families on this list, Weitz and Dodge & Cox, are notable in other ways. Both are well-known as value shops whose managers like to own out-of-favor stocks, and while neither one had any individual funds among the top 10 holders of Fannie and Freddie, their funds often tend to hold such beaten-down former blue chips. Dodge & Cox Stock DODGX, in particular, has held significant positions in a number of stocks hit hard by the mortgage crisis, such as Wachovia WB and AIG AIG, which the managers feel have been unduly punished. It remains to be seen how those bets will pan out, but the fund's bet on Fannie and Freddie has turned out to be a losing one. Dodge & Cox's familywide stake of 0.72% in Fannie and Freddie may not look all that impressive at first glance, but that represents about $1 billion in market value--almost all of which is gone now.

David Kathman is a fund analyst with Morningstar

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