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Fund Times: J.P. Morgan's Surge Benefits Big Funds

Plus, new PIMCO funds, the latest at Janus, and more.

Morningstar Analysts, 03/24/2008

Some widely held mutual funds got a boost this week from sizable holdings in J.P. Morgan Chase JPM, demonstrating how Wall Street's recent pains will produce winners along with losers. J.P. Morgan shares jumped more than 10% Monday as investors voted that it got Bear Stearns on the cheap. Large-blend titan Davis NY Venture NYVTX keeps more than 3% of its assets--its sixth-largest position--in J.P. Morgan. Next up after the Vanguard 500 VFINX (from the standpoint of funds' absolute positions in J.P. Morgan) is American Funds Washington Mutual AWSHX, with 1.6% of assets in the bank. The boost from this stake has helped the fund into the top quartile of large-value funds so far in 2008. Vanguard Windsor II VWNFX also owns a large position. Windsor II also held a significant stake in Bear Stearns BSC, and it wasn't alone.

PIMCO Launches Fundamental Advantage Funds
PIMCO Fundamental Advantage Tax Efficient
PFAEX and PIMCO Fundamental Advantage Total Return PFATX are heading your way. The latest from the fixed-income giant are market-neutral funds that invest for appreciation in the Enhanced RAFI 1000 Index (tracking the 1,000-largest U.S. stocks), while shorting the S&P 500. The tax-efficient version backstops its design with investments in municipal bonds, while the total-return version buys taxable equivalents. PIMCO offers these funds to take advantage of what it views as inherent flaws in market-cap-weighted indexes such as the S&P 500.

According to the funds' prospectuses, such indexes overweight stocks that are already overvalued and underweight ones that are too cheap. By shorting the S&P 500 and investing proceeds (and/or underlying fund assets) in the RAFI index--which PIMCO believes offers more-efficient stock weightings based on measures such as cash flows, book value, and dividends--PIMCO plans to take advantage of such inefficiencies. The bond portion of each portfolio will help give the funds a market-neutral feel. Time will tell whether these complicated strategies meet their objectives. But the bigger question is whether everyday retail investors really need funds with such strategies.

More Changes at Janus
Janus Adviser Long/Short
JALSX is closing March 24, as assets now exceed $1 billion. Also, one of the fund's comanagers, Dan Kozlowski, is leaving the firm. David Decker and Dan Riff are still aboard, with Decker taking a lead role. Adviser Long/Short got off to a hot start in late 2006. That success continued into 2007, and, in the midst of high market volatility, it has held up better than average in the long-short group in 2008. Current shareholders will be able to buy new shares after the fund closes, but we remain concerned about high fees, and shareholders should expect some bumps in the road eventually. We also want to see more from this fund before we'll be convinced that it can excel in the murky world of stock-shorting.

Fidelity Bond Funds See Temporary Manager Change
Fidelity Short-Term Bond
FSHBX and Fidelity Ultra-Short Bond FUSFX comanager Andrew Dudley is on a leave of absence. A supplement to the funds' prospectuses doesn't indicate an expected duration, but we anticipate that comanager Robert Galusza will manage the funds solo until he's back. These are two of a handful of Fidelity bond funds that have struggled over the past 12 months. In particular, Ultra-Short Bond has seen losses that are exceedingly rare for funds in its category. It lost more than 10% in the one-year period ending March 18, 2008, pulled down by exposure to short-term subprime debt. Despite the fund's unsettling volatility of late, Fidelity's team makes a case that a significant recovery could be in store for investors who are willing to wait it out.

Dynavax Stumble Hurts Kaufmann Funds
Federated Kaufmann Small Cap
FKASX and Federated Kaufmann KAUFX took a hit this week with their investment in Dynavax Technologies DVAX. The FDA told this small-cap biotech company to halt its Phase-3 trial of a vaccine product until it resolves safety issues. Its stock has plunged more than 50% since, and its market cap is now less than $100 million. If ever there were a case of a difficult-to-exit micro-cap position, this could be it for both the small-growth and mid-growth fund, respectively. Combined, the two funds own a remarkable 21% of the company. But luckily for Kaufmann funds' shareholders, Dynavax was not a large position in either fund. And stocks of such small-cap biotech companies are often binary situations. As easily as they can tank, they can soar on a single bit of news.

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