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Will Education Stocks Test These Funds?

The credit crunch takes a toll on for-profit education.

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Among the many ripple effects of the subprime-mortgage meltdown has been a tightening of credit markets in general, making it tougher for many people and institutions to borrow money. As the credit crunch has worsened, its effects have been spreading to some areas previously considered safe. For example, a seize-up in the market for auction-rate securities has burned many institutions that thought that they were being cautious, and the shocking collapse of  Bear Stearns (BSC) two weeks ago was ultimately a result (if indirectly) of the tight credit environment. Of course, the housing market continues to struggle, and many makers of big-ticket consumer items that are typically financed, such as automobiles, are facing weak sales and falling stock prices.

Fears of a similar slowdown have recently hit another industry that relies on its customers being able to borrow money--for-profit education. Firms such as  Corinthian Colleges (COCO) and  Apollo Group (APOL), parent of the University of Phoenix, charge big money for tuition (though not necessarily more than traditional private colleges), and most of their students have to borrow some or all of the cost. Such companies have traditionally done well in weak economies as more people go back to school, and indeed, most of these stocks posted big gains in the first 10 months of last year. Since November, however, most of them have declined significantly amid a worsening environment for student loans, especially from the private lenders on which many of their students rely. Firms with the most exposure to private loans have been hardest-hit, but just about everybody has suffered. Apollo Group, with relatively light private-loan exposure, was up 80% in 2007 but was down 20% this year through March 27, and it fell an additional 27% on March 28 after reporting disappointing earnings. Corinthian Colleges gained 13% in 2007 but fell 49% this year through March 27, while Capella Education (CPLA) soared 170% last year but fell 10% this year through March 27; both fell an additional 8% to 9% on March 28.

What effect has this reversal in education stocks had on mutual funds? To find out, we looked at the 10 funds with the largest percentage of their portfolio in this industry, with the results shown in the following table. The table shows each fund's category, size, percentage of portfolio in education stocks, and percentile rank within its category in 2007 and for year-to-date 2008 as of March 25:

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