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Fund Times: Housing Slowdown Impacts Fund Results

Plus, news on Fairholme's energy stake, Columbia fee cuts, and more.

Morningstar Analysts, 08/11/2006

Many fund managers that have participated in the housing boom of recent years by purchasing the stocks of homebuilders are this year feeling the pain of a slowing housing market as these stocks decline. Luxury homebuilder Toll Brothers TOL, for instance, just announced a disappointing third-quarter (ending July 31) decline in revenue of 0.5%, when many analysts had forecast a 7% increase for the period. The firm's stock traded down nearly 5% Wednesday after the announcement was made, and is down 28% for the year through Aug. 9. Funds like Muhlenkamp Fund MUHLX, run by Ron Muhlenkamp, a manager we have a great deal of respect for, have suffered this year, due to positions in homebuilders. Muhlenkamp Fund, for example, is down 6.8% on the year, placing it at the very bottom of the large-value category.

Muhlenkamp, however, got into Toll early on, which aided his fund's returns over the past several years. Despite the recent stock price volatility, he's sticking with his pick, along with others in the sector. He thinks the macroeconomic and fundamental stories behind the stocks are still sound. Alpine U.S. Real Estate Equity Fund EUEYX, like many funds in the real estate category, also has been hurt by the decline in homebuilder stocks.

For those who are nervous about "housing bubbles," though, there are some soothing words from PIMCO managing director W. Scott Simon. In a recent commentary, Simon said that while "the housing market continues to slow every day it's not falling off a cliff."

Fairlholme's Energy Stake
It's well known that Bruce Berkowitz, the lead manager of the Fairholme Fund FAIRX (one of our favorites), is a big fan of Warren Buffett's investment approach, and of Buffett's Berkshire Hathaway BRK.B. Indeed, he's invested over 16% of the fund's assets in Berkshire. Less well known, perhaps, is the fund's equally large weighting in the energy sector, and in particular, in two companies: Canadian Natural Resources CNQ and Penn West Energy Trust PWE. Given the runup in these stocks over the past few years, one might think that Berkowitz would be nervous about their valuations, but recently, in his July 17 shareholder letter, he explained why he isn't:

"The market also seems to be undervaluing current and expected cash flows from our non-U.S. energy companies, Canadian Natural Resources Ltd. and Penn West Energy Trust, which represent 9.27% and 6.83% of the Fund's new assets, respectively. Our companies have the people, plans, and assets in place to dramatically increase production of higher-value products--the ultimate hedge against unforeseen lower prices. Meanwhile, geopolitics, a dearth of cheap and easily obtainable supply, and the world's increasing desire for basic pleasures we take for granted argue for a stubbornly high oil price, currently over $70 per barrel (in both spot and forward markets)."

Columbia Cuts 12b-1 Fees on B Shares of Acorn Funds
Columbia Wanger Asset Management, advisor to the Columbia Acorn fund lineup, has announced it is cutting the 12b-1 fees on the B share class of these funds, due to increased economies of scale the firm has achieved from asset inflows. The 12b-1 fees will be cut by 10 basis points, from 0.85% to 0.75%, below the industry average for B shares. We're glad to see these fees come down, as they will help make the fund more competitive and may force other asset management firms to follow suit, which would be positive for investors.

Franklin Templeton Announces Four Target-Date Funds
Franklin Templeton Investments recently launched its Franklin Templeton Retirement Target Funds, which, like other options in the target-date category, will provide asset allocations that get more conservative as investors approach retirement. These four fund-of-fund products will have projected retirement dates of 2015, 2025, 2035, and 2045. Portfolio manager T. Anthony Coffey will consider "the underlying funds' foreign and domestic exposure, market capitalization ranges and investment styles" when choosing equity funds for the portfolios, the statement said. When choosing fixed-income funds, he will focus on "obtaining the maximum amount of current income," though we hope this doesn't come at the expense of total return.

Legg Mason Leaves South Dakota 529 Plan
Legg Mason Capital Management recently announced it would no longer serve as distributor of South Dakota's Core4College 529 Plan, effective Sept. 2, 2006. As of July 2, this small $35 million plan no longer accepted new accounts. We don't think this move says too much about Legg Mason's commitment to the 529 business, however, since its purchase of the Smith Barney fund lineup (now under the Legg Mason Partners name) provided the firm contracts to distribute its funds to Illinois' Bright Start College Savings Program, with over $1.8 billion in assets, and Colorado's Scholars Choice College Savings Program, with nearly $2 billion in assets.

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