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Fund Spy

Subprime Crisis Yields Nasty Fund 'Surprises'

Why it's a mistake to fight the last war.

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Last week Gregg Wolper capably argued that despite all of the hand-wringing over the anomalous aspects of the summer subprime sell-off (try saying that 10 times fast), many of the market's chief behavioral patterns have remained intact. Bonds have outperformed stocks, high-quality bonds have beaten junky ones, and stocks and bonds from developed markets have trumped those from more exotic locales.

Within certain fund asset classes and categories, however, you can identify some performance patterns that could challenge your assumptions about what's safe and what's not. Some of the securities and fund types that fared well in previous market sell-offs have struggled mightily, while other securities and funds you might've filed under the "higher-risk" category have held up pretty well.

Russ Kinnel has already touched on the poor recent performance of ultrashort funds--which heretofore had seemed to be the tamest part of the fund world. What follows is a review of some of the other notable--and nasty--surprises for fund investors over the past month. The bottom line? It's a mistake to extrapolate too much from how investments have fared in previous market downturns, because every down market has different catalysts and affects some securities more than others. If you stay diversified and avoid overheating sectors, however, you'll stand a good chance of faring well in future downturns. That's because in this last correction--as in others--the areas that had recently enjoyed the biggest performance runups have proved the most vulnerable.

Christine Benz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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