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The 10 Biggest Bets on Homebuilders

Some smart managers still like this troubled industry.

David Kathman, 10/30/2007

After years of steadily rising home prices and widespread talk of a bubble, the U.S. housing market has finally hit the skids in a big way this year. There were already signs of trouble last year, but for much of 2007 the industry has been in full-blown crisis mode, with mortgage defaults rising and home prices stagnant or falling. High default rates in subprime mortgages resulted in this summer's credit crunch, which in turn had a ripple effect on the broader market and worsened the housing crisis. It's still not clear when the housing market will hit bottom or how extensive the damage will end up being.

Among the many industries to be negatively affected by the housing downturn, one of the hardest hit has been homebuilders. With housing orders way down and an upturn possibly years off because of a supply glut, all the major homebuilders have seen their profits get badly squeezed and their stock prices drop sharply. Most of the major players are struggling; as of Oct. 23, Lennar LEN, D.R. Horton DHI, Pulte Homes PHM, and Centex CTX were all down more than 50% for the year to date and more than 30% for the trailing three months. The average homebuilder stock is down 44% for the year to date, making it by far the worst-performing industry in our database.

Mutual funds that hold a lot of homebuilder stocks have naturally been hurt by all this. Worst hit have been the specialty funds. There are two exchange-traded funds focusing on domestic homebuilder stocks, iShares Dow Jones US Home ITB and PDR S&P Homebuilders XHB, plus one conventional mutual fund focusing on the industry, Fidelity Select Construction & Housing FSHOX. All three have had a predictably tough time this year.

Beyond those niche offerings, it's interesting to see which other funds have the most homebuilder exposure. Here are the 10 mutual funds in our database (excluding ETFs) with the largest percentage of their most recent portfolios in homebuilder stocks, along with the size of each fund's asset base and the percentile rank of its returns relative to its category so far this year. The Fidelity sector fund is near the top of the list, along with two real-estate sector funds, but after that it's a pretty mixed bag. Not surprisingly, nearly all of these funds have suffered through terrible performance this year relative to their peers, with eight of the 10 ranking in the bottom 3% of their respective categories. In that sense they're the opposite of the funds with big China stakes that we looked at a couple of weeks ago, most of which are beating their categories handily this year:PAGEBREAK

 Biggest Homebuilder Bets
 

Category

Size
($Mil)
Homebldrs
(%)
% Rank
Cat YTD
Franklin Real Estate Securities FREEX
Real Estate
667 21.72 99
Fidelity Sel Construct & Housing FSHOX
Mid-Blend
94 18.65 99
Alpine U.S. Real Estate Equity EUEYX
Real Estate
149 18.51 86
Touchstone JSAM Inst Value CIJVX
Mid-Value
40 10.21 100
ING Neuberger Berman Prtnrs INBSX
Lg Blend
435 8.86 44
Diversified Value DIVLX
Lg Value
150 7.19 98
ING FMR Mid Cap Growth IMMSX
Mid-Growth
503 6.84 98
Hotchkis and Wiley Mid-Cap Val HWMIX
Mid-Value
4,058 6.69 98
Hotchkis and Wiley Small-Cap Val HWSIX
Sm Value
506 6.47 99
Principal Inv Prtnrs MidCap Gr II PIIMX
Mid-Growth
575 6.26 97

 

The one outlier here is ING Neuberger Berman Partners Portfolio INBSX, a near-clone of the much larger Neuberger Berman Partners NPRTX. This fund has actually beaten the large-blend category this year despite its big homebuilder stake, which manager Basu Mullick has been trimming lately due to short-term concerns. Mullick has led Partners to great results in the long term, and he isn't afraid to be contrarian at times. Of the other funds listed here, the two Hotchkis and Wiley funds have also done very well in the long term; Mid-Cap Value HWMIX has beaten its category every year since 1998, though that streak will be broken this year, and Small Cap Value HWSIX was in its category's top decile for five straight years before crashing in 2006. The management team behind those funds is even more explicitly contrarian than Mullick, willing to make bold bets that often work but sometimes blow up.

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