Fund Times: Housing Slowdown Impacts Fund Results

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 , 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."

Fairholme'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.

Additionally, we're not sorry to see Core4College go. Historically, it had been very expensive, and the state's other 529 option, South Dakota College Access 529, managed by PIMCO, is a solid choice for college savers. In fact, College Access 529 was named one of Morningstar's "Best Broker-Sold 529 Savings Plans" for 2006.

Lord Abbett Fund Gets New Manager
As of July 31, 2006,  Lord Abbett Growth Opportunities Fund (LMGAX) manager Kevin Ferguson has been replaced by Frederick Ruvkun. Ruvkun comes from J. & W. Seligman and Co., where he served as head of the small-cap growth team and portfolio manager of SMID Cap Growth Assets. Ferguson had been a portfolio manager at Growth Opportunities since July 2000, first on a team, then by himself, and his track record was middling in recent years. We'll be watching closely to see if this management move improves the fund's prospects, though given its hefty levy, we think Ruvkun will face an uphill battle here.

Reynolds' NFL Attempt Intercepted
The National Football League passed over Bob Reynolds, Fidelity Investments' vice chairman and chief operating officer, for the position of commissioner Wednesday when team owners voted NFL insider Roger Goodell to the post. Reynolds had been short-listed for the position, one of the most prestigious in professional sports, but we now expect he'll continue serving at Fidelity, where he's been for 22 years.