Funds with a lot riding on housing.
Morningstar's fund analysts cover 2,000 mutual funds. Their full analyst reports, including Stewardship Grades, are available in Morningstar Principia Mutual Funds Advanced and Morningstar Advisor Workstation Office Edition.
This article originally appeared in Morningstar FundInvestor, an award-winning newsletter that presents investment strategies and tracks 500 funds.
The biggest stock story of 2007 has been the meltdown of subprime mortgage outfits. Most experts seem to think that a protracted, severe housing downturn is unlikely and that a domino effect that causes many high-quality mortgage defaults is similarly improbable. But experts sometimes are wrong, and some economists who lean heavily on demographics think housing values could take a long, painful downhill slide.
Besides, it's clear that credit standards eroded dramatically the past few years and a broad slowdown in the housing market is continuing. So even if disaster isn't looming, funds with heavy exposure to housingrelated stocks could have a bad short-term indeed. That is something that all three of the managers discussed here realize, but they believe they'll be vindicated in the long run.
Actually, all of Wally Weitz's funds have big housing stakes, but this one looks to have the largest. As of Dec. 31, 2006, nearly 24% of assets are devoted to housing-linked stocks--mainly those in various segments of the mortgage industry. The biggest individual stakes are in Redwood Trust
Weitz, a seasoned contrarian, has hardly been shaken by the troubles. Indeed, when we spoke to him a few days after subprime lenders Novastar Financial
Ron Muhlenkamp's eponymous fund has the second-worst returns from Jan. 1, 2006, through April 30, 2007, of any large-value fund in Morningstar's database. That's in large part because Muhlenkamp has remained true to his long-term practice of holding for extremely long periods of time; the economically sensitive fare that boosted the fund from 2003 through 2005 remains in the fund. A big part of that bet is housing-related firms, which we tally up as 27% of assets on Dec. 31, 2006.
While Muhlenkamp has since sold a couple of homebuilders--Centex