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Fund Times

Fund Times: Subprime Worries Give Some Funds a Tough Go

Plus: Manager changes, new funds, and more.

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  shed about 15% so far in 2007. Similarly,  Putnam Fund for Growth & Income ,  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 , 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  and Marsico Flexible Capital  . 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 1.60%.

AIM Technology Fund Gets New Manager
AIM announced that Michelle Fenton has stepped down from  AIM Technology (FTCHX), which she had managed or comanaged since late 2003. Lanny Sachnowitz, who is entering his 20th year with the investment advisor, will take over the fund on an interim basis until AIM names a permanent manager. He'll also get support from the same team that supported Fenton. Shareholders have reason to be disappointed about Fenton's departure. In 2006, her first year running the fund as a solo effort, she helped the fund deliver its first top-half returns in the specialty-technology category in six years.

Jennison to Close Rapidly Growing Fund
Jennison Associates will close small-growth fund  Jennison Small Company (PGOAX) on April 27, 2007. Under current manager John Mullman, assets have grown to nearly $1.5 billion. We think this move will benefit current shareholders, as it should allow Mullman the continued ability to take meaningful positions in smaller stocks. And he has done that with steady success since taking over in May 2000: The fund has topped over 90% of rivals with Mullman in charge.

American Century Sees Another Manager Departure
Michael Donnelly, comanager of  American Century Emerging Markets (TWMIX), is leaving the firm to pursue other opportunities. Donnelly was the fund's longer-tenured manager--he took it over in 1997--with Patricia Ribeiro joining in mid-2006. Ribeiro and a three-person analyst team will continue to work on this diversified emerging markets fund as American Century seeks a new comanager to join them. While some managers leave funds for poor performance, this may be the opposite case. The fund gained 36% and 43% in 2005 and 2006, respectively--returns that strongly outperformed competitors in an extremely hot asset class. Over longer time periods, too, Donnelly's 11% annualized gain since taking over in 1997 tops over 75% of competitors with equally long track records.

Calvert Fund Gets New but Familiar Subadvisor
Bridgeway Capital Management's John Montgomery is now in charge of  Calvert New Vision Small Cap . He takes over after the previous subadvisor, Renaissance Investment Management, delivered bottom-decile returns among small-blend rivals in both 2005 and 2006. This isn't the only Calvert fund that Montgomery manages--he has also run Calvert Large Cap Growth  since 1994.

Montgomery's performance at Large Cap Growth may offer hope for New Vision Small Cap shareholders: That fund's five-year annualized return of 9.2% tops 97% of large-growth rivals'.

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