Funds with Big Goldman Sachs and Morgan Stanley Stakes

Major stock indexes are up by more than 20% over the past two months, and many of the stocks benefiting most from this surge are the same ones that suffered the most in last year's terrible market slide. For example, energy and materials stocks fell hard in the second half of 2008 amid plunging commodity prices, but they're on fire the past few months, with mining giants such as  Rio Tinto  and  Freeport-McMoRan Copper & Gold  (FCX) up more than 100% for the year. Big technology stocks such as  Apple (AAPL) and  Google (GOOG) got hammered in 2008 but are up big in 2009, as we noted recently.

Of course, financials were at the heart of last year's storm, and many financial stocks have posted big gains in the past couple of months--admittedly from very depressed levels. Banking giants  Citigroup (C) and  Bank of America (BAC) have tripled in price from the lows they hit in early March, when it was widely feared that they would have to be nationalized, and most big regional banks have also rebounded, albeit less dramatically. Two other financial giants that have come up off the canvas after being beaten down are  Goldman Sachs (GS) and  Morgan Stanley (MS), the two big Wall Street investment banks left standing after the turmoil that claimed Bear Stearns, Lehman Brothers, and Merrill Lynch last year. Both companies have continued to report big quarterly losses, but the pessimism surrounding them has eased amid tentative signs that the U.S. economy and banking system are stabilizing. As of May 6, Goldman Sachs was up 61% for the year to date and Morgan Stanley was up 72%, though both are still down more than 30% over the past year.

Earlier this year, when pessimism still reigned, we looked at which mutual funds had the biggest stakes in big multinational banks and major regional banks. Not surprisingly, we found that these funds' returns had suffered significantly. More recently, after the financial rebound had started, we revisited these funds and found that their one-month returns had improved dramatically, though their one-year returns still looked ugly.

We thought that it would be interesting to take a similar look at the funds with the biggest stakes in Goldman Sachs and Morgan Stanley. Back in September 2008, right after the collapse of Lehman Brothers, we made separate lists of funds that were heavy in Goldman and in Morgan Stanley. (You can see those lists here.) This time, we looked at funds with the biggest combined percentage of their portfolio in the two stocks. Not surprisingly, several of the funds on the initial list are financials-sector funds, but we decided to restrict the final list to diversified funds, as well as those with at least $50 million in assets. We also eliminated funds that are clones of others on the list.

The results are shown in the table below. It includes each fund's category, the size of its asset base, the combined percentage of its portfolio in Goldman Sachs and Morgan Stanley as of the most recent portfolio, its percentile ranking in its category for the year to date as of May 6, and its percentile ranking for the past 12 months, also as of May 6.

Funds with Big Goldman Sachs and Morgan Stanley Stakes
	Category	Size ($M)	GS/MS %	% Rank Cat YTD	% Rank Cat 1 yr
Janus Orion (JORNX)	Mid-cap growth	2,171.4	7.66	15	90
Wells Fargo Adv Lg Co Gr	Large-growth	574.9	7.62	12	5
Natixis CGM Adv Target Eq	Large-growth	844.7	6.45	95	89
Janus Growth & Income (JAGIX)	Large-growth	2,846.5	6.05	21	54
MassMutual Sel Focused Val (MFVAX)	Large-blend	416.1	5.66	1	14
JPMorgan Value Opp	Large-value	419.4	5.65	28	62
Parnassus (PARNX)	Large-growth	224.0	4.39	4	2
Jennison Value	Large-value	625.0	4.33	4	57
Marsico Focus (MFOCX)	Large-growth	2,028.4	4.18	70	67
Hartford Capital Apprec (ITHAX)	Large-blend	13,562.3	4.03	5	87

This group is looking pretty good so far in 2009. Eight of the 10 funds are beating their categories for the year to date, with four ranking in the top decile and another couple just missing it. This strong performance isn't solely due to Goldman Sachs and Morgan Stanley, of course, but it's surely significant that nine of these funds (all except  Jennison Value ) are overweight in financial stocks relative to their category, with several having twice the financial weighting of their average peer. That's undoubtedly also a big reason why most of these funds are trailing their categories over the past year, when financial stocks as a group are still way down.

In contrast, it's interesting to note how funds betting against Goldman and Morgan Stanley have suffered this year. Fifteen mutual funds in Morningstar's database, mostly long-short funds, have short exposure to Goldman Sachs and/or Morgan Stanley, meaning that they benefit if those stocks go down and are hurt if the stocks go up. Five of these funds--American Century Long-Short Market Neutral , Grizzly Short (GRZZX), DWS Disciplined Market Neutral , Dover Long/Short Sector , and UBS PACE Alternative Strategies (PASIX)-- have at least 0.50% short exposure to the two stocks. All five of these funds are doing significantly worse than their category for the year to date, and the American Century fund, whose 3.62% short exposure to Goldman Sachs is by far the largest, ranks in the bottom decile of the long-short category. On the other hand, all five of these funds have beaten their categories over the past year.

Of course, the short-term results that we're discussing here aren't too significant in the long term, but they do illustrate how volatile the past year's market has been, and how one month's big losers can be big winners the next month (and vice versa). Morningstar's stock analysts see both Goldman Sachs and Morgan Stanley as being about fairly valued at their current levels, but with very high fair value uncertainty, reflecting the continuing questions about the stability of the U.S. banking system. Most of the funds with big stakes in these two stocks have done well lately, but that could change quickly.