Fund Times: Emerging-Markets Sell-Off Hurts Funds

A move from high-risk securities to safer ground has hit many emerging-markets funds hard. In particular Russian, Indian, and Latin American markets have declined sharply.

These areas have been among the most popular with investors, but as usually happens the markets have punished performance chasers. Direxion Emerging Markets Bull 2.0  is off 23% for the trailing four weeks.  U.S. Global Investors Eastern Europe  is off 21%, while  T. Rowe Price Emerging Europe & Mediterranean (TREMX) is down 18%. Eaton Vance Greater India  (ETGIX) is off 14%.

Energy and precious-metals funds have also been hard hit.  Fidelity Select Natural Gas  and Profunds Precious Metals Ultra (PMPIX) are both down 15%.

U.S. funds have taken a hit, too.  Hennessy Cornerstone Growth (HFCGX) is among the hardest hit with a 13% loss due to the fund's big weightings in energy and materials stocks.  CGM Focus  is off 11% due to big bets on copper and energy stocks. Alger MidCap Growth (ALMRX) is also down about 11% because of a big energy weighting.

The sell-off has also rearranged the performance leadership of some of the biggest funds. For example,  Fidelity Magellan's (FMAGX) great start under Harry Lange has hit the skids. The fund now lags the S&P 500 by about 30 basis points due to its move into Japanese stocks and an increased energy bet. The fund has been one of the worst performers among large-blend funds for the past four weeks.

Undiscovered Managers Small Cap Growth to Close
Undiscovered Managers Small Cap Growth  will close to new investors on May 26, 2006, according to a recent filing. The fund, which is subadvised by Mazama Capital Management, has around $350 million in assets.

Heartland's Eric Miller Leaves
Heartland Funds announced that Eric Miller has resigned as of May 26 "in order to pursue other interests." Miller is comanager on Heartland Value Plus (HRVIX) and  Heartland Value (HRTVX) funds.

Miller also resigned his position of CEO of Heartland Group. David Fondrie was named to replace him. At Heartland Value, Hugh Denison was named to replace Miller as comanager.

Heartland remains under siege as it faces SEC charges stemming from the 2000 meltdown of two Heartland muni-bond funds.

Milberg Weiss Indicted
If it is possible for champagne to be quietly uncorked, then that no doubt happened at a number of fund companies on the news that the law firm Milberg Weiss was indicted last week. The firm has filed numerous class action suits against fund companies.

According to Dow Jones, prosecutors allege that the firm paid improper kickbacks to clients who agreed to file suit.

Turner to Merge Funds
If shareholders approve, $15 million  Turner Technology  will be merged into $31 million  Turner New Enterprise , according to a recent SEC filing. In anticipation of the merger, the Technology fund will close to new investors effective June 30, 2006.

We think the merger makes sense. The funds are run by the same management team (Chris McHugh, Bob Turner, and Tara Hedlund) and in a similar investment style, which focuses on earnings momentum and positive price trends. Both funds tend to be fairly concentrated (around 40 to 50 stocks), and turnover tends to be fairly high at both funds.

That said, the merger may not please investors who want a pure technology play. New Enterprise fund is designed to be a more diversified offering than the Technology fund--it recently devoted about 50% of assets to the sector. However, in recent years, New Enterprise's diversification into other sectors has helped keep it afloat in rough and smooth markets (for tech stocks) alike. New Enterprise's one-, three-, and five-year returns all fall into the technology category's top decile, while the Technology fund's returns have been less impressive over the same periods.