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Fund Times: Subprime Worries Give Some Funds a Tough Go

Plus: Manager changes, new funds, and more.

Morningstar Analysts, 03/19/2007

The S&P 500 Index has lost only 1.8% for the year to date through March 14, but some managers have suffered due to their ownership of stocks exposed to the subprime mortgage-lending market.

Not surprisingly, funds that focus specifically on the financial-services sector have generally been hit the hardest. For example, FBR Small Cap Financial FBRSX, which focuses on regional banks, has lost about 9% this year. Manager David Ellison is a proven stock-picker, but investors' punishment of small bank stocks--even those with conservative loan portfolios, as preferred by Ellison--have left the fund nowhere to hide.

The subprime lending sector's troubles have also extended to diversified stock funds. For example, Bill Miller's Legg Mason Value LMVTX has lost 3.3% this year, as 10th-largest holding Countrywide Financial CFC shed about 15% so far in 2007. Similarly, Putnam Fund for Growth & Income PGRWX, Weitz Partners Value WPVLX, and T. Rowe Price Growth Stock PRGFX all hold significant Countrywide positions and all trail the S&P 500 this year.

Bond funds might also appear to be vulnerable to weakness in the mortgage market, because many focus on mortgage-backed securities. However, most mortgage-backed funds have escaped serious harm. Even struggling funds such as intermediate-term competitor Fidelity Mortgage Securities FMSFX--which trails 95% of category rivals this year--have managed gains. That's because most mortgage-backed managers prefer mortgage-backed securities issued by Fannie Mae FNM, Freddie Mac FRE, or Ginnie Mae. The U.S. government backs such bonds, so credit risk is less of a concern.

While the market's still trying to figure out the "subprime" impact, investors can chart a safe course by staying diversified. Financial services represent the S&P 500's largest sector, but the index's small losses this year are proof that it can weather well the troubles of one industry.

T. Rowe Price Shuffles Managers
T. Rowe Price, which rarely sees significant changes in its manager ranks, recently announced changes to three funds: T. Rowe Price Capital Appreciation PRWCX, T. Rowe Price Growth & Income PRGIX, and T. Rowe Price Financial Services PRISX. Capital Appreciation currently has two managers, David Giroux and Jeff Arricale. But Arricale will leave the offering in June, as he recently assumed full responsibility for the Financial Services fund from Michael Holton, who left the firm at the end of February. Arricale is a former financial services analyst for the company, and in his new role, he'll not only manage the sector fund but further develop T. Rowe Price's large financial services team.

Elsewhere, Tom Huber took over on March 1 for Anna Dopkin at Growth & Income. Huber delivered nice returns for shareholders at another charge, T. Rowe Price Dividend Growth PRDGX, where he became manager in March 2000. Since that time, the fund's annualized return of 7.1% placed in the large-blend category's top quintile. Shareholders of Dividend Growth shouldn't worry, however, as Huber will remain in charge of that fund as well as Growth & Income.

Marsico Readies New Fund for Launch
Marsico Capital plans to launch a new offering, Marsico Global Fund, later this spring. The fund will target non-U.S. stock exposure at about 40% of assets, with variances based on market conditions. Corydon Gilchrist will lead the offering. Gilchrist also manages Marsico 21st Century NMTAX and Marsico Flexible Capital MFCFX. His results at 21st Century, which he took over in February 2003, have been top-tier: his annualized return of 23.5% through Feb. 28, 2007, tops all but two funds in the packed large-growth category. This new fund will initially charge 1.6%.PAGEBREAK

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