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Fund Times: Mortgage Sector Woes Continue to Hurt Funds

Plus, news on PIMCO, Fidelity, and Evergreen.

Morningstar Analysts, 08/06/2007

American Home Mortgage Investment Corp. AHM, a REIT that also originates, services, securitizes, and invests in residential mortgage loans, dropped nearly 90% on July 31, taking some funds with it. For example, Schneider Small Cap Value SCMVX and CIP JSAM Value CIJVX held large stakes in the firm (5.68% and 8.35%, respectively), based on their most recently filed portfolio holdings. Hotchkis and Wiley Mid-Cap Value HWMIX, Munder Small-Cap Value MCVYX, and several others had smaller stakes.

American Home Mortgage's troubles began in recent weeks as the market for its mortgage-backed securities dried up, when concerns over the subprime mortgage crisis widened. A liquidity crisis ensued, as the firm, unable to sell its loan packages, lost access to its credit lines and saw lenders initiate margin calls that sent the firm into a classic credit crunch. On July 27, the firm announced it would have to delay payment on its dividend. By July 30 uncertainty over the firm's future caused the NYSE to halt the trading of its stock. And on July 31, the company announced it was unable to originate loans.

Interestingly, when the stock stopped trading, funds holding it had to decide whether to use some version of fair value pricing to value the shares fairly. Because no current market price was available, the pricing committee at Schneider Small Cap Value, for example, decided to use the final bid price off electronic broker Instinet of $6.42, which was already quite a bit lower than the $10.47 share price recorded when trading was suspended. When trading reopened, however, the stock quickly dropped even further. As it stands for the trailing week, ending Aug. 1, the fund is down 9.69%, and CIP JSAM Value is down 10.41% for the period.

PIMCO Launches Retail Shares of Emerging-Markets Fund
On July 31, PIMCO announced the launch of A, C, and D retail share classes for its PIMCO Emerging Local Bond PELBX, which was previously available only in institutional shares. This change makes all three emerging-markets bond strategies PIMCO offers available to individual investors.

Formerly, investors had the option of investing in PIMCO Emerging Markets Bond PEMDX, which provides exposure to the sovereign debt of emerging-markets countries, but typically focuses on issues denominated in U.S. dollars, eliminating most currency risk. The PIMCO Developing Local Markets PLMIX fund, in contrast, will typically purchase local currency emerging-markets debt, giving investors exposure to these currencies and the diversification benefits, and risks, which this entails. Developing Local Markets, however, will stick to short-term debt in these markets, providing investors with short-term yields, but less interest-rate risk. Finally, Emerging Local Bond will now allow investors to gain exposure to both local currency debt, and emerging-markets interest-rate movements. While these market exposures can have valuable diversification characteristics, investors should also be aware of the added volatility that can come with these risks.PAGEBREAK

Fidelity Shuffles Management at Gold and Bond Funds
Fidelity Investments recently named S. Joseph Wickwire II as manager of Fidelity Select Gold Portfolio FSAGX. Wickwire replaces Daniel Dupont, who will continue to serve as an analyst at Pyramis Global Advisors, Fidelity's institutional management unit. We're initially encouraged by the change, as Wickwire brings a solid track record from Evergreen Investments, where he ran Evergreen Precious Metals EKWAX from March 2004 to June 2007. He also served as an analyst of the natural-resource rich Canadian, Australian, and New Zealand equity markets, as well as of the precious metals, base metals, and paper industries. It's good to see more experienced managers taking over at Fidelity's sector funds.

Additionally, Matthew Conti was named comanager of Fidelity Total Bond FTBFX, where he joins comanager Ford O'Neil. Conti succeeds Eric Mollenhauer, who will be managing floating rate high-yield portfolios for institutional clients. Conti continues to manage Fidelity Focused High Income FHIFX and Fidelity Advisor High Income FHIAX, among other portfolios. Conti has good experience in Fidelity's high-yield bond group, where he's worked since 1995, and we think his expertise will be a valuable addition to the Total Bond Fund, where management can dip opportunistically into high-yield markets.

Evergreen Investment Head Departing
Evergreen Investments' chief investment officer Chris Conkey has left. Conkey's watch has seen a lot of portfolio manager and analyst turnover over the past year, but we've been impressed by a few of the replacements he had found. For example, he hired a couple respected high-yield managers: Margie Patel, formerly of Pioneer Investments, and Andrew Cestone, formerly of Deutsche Asset Management. His duties will be taken over on an interim basis by chief executive officer Dennis Ferro.

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