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Fund Times

Fund Times: What CIT Group Troubles Mean for Funds

Plus, research from Arnott suggests market fairly valued, and more.

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 CIT Group (CIT), one of the nation's largest lenders to small and midsize companies, is on the ropes. According to news reports, the company is struggling to refinance its debt as the credit crunch has limited the company's access to the corporate-bond market.

The company's stock has fallen sharply this week after reports the federal government denied the company's requests for aid. Shares of the S&P 500 constituent are now down more than 89% for the year to date.

Index funds and ETFs that track the S&P 500 all have exposure to the company, though their stakes are small because of CIT's relatively small market capitalization. For example, while  Vanguard 500 Index (VFINX) owned almost 1% of the shares outstanding as of March 31, the fund had only 0.02% of assets in the company.

Some other funds, however, have not been as fortunate. As of June 30, 2009, Academy Select Opportunities (ASELX) had a staggering 11% of its assets in the company. Even more troubling for shareholders here is that manager David Jacovini was buying more shares in the first quarter as the stock's price sunk after reports of the company's continued trouble. While Jacovini sold some of his stake before the stock's recent collapse, the fund still had significant exposure to the company. This stake has hurt shareholders, and over the last month alone the fund dropped close to 6% and trails 99% of its small-blend peers over the same period.

Other funds with more than 2% of assets in CIT as of March 31 include another Academy fund, Academy Core Equity (ACORX), SunAmerica Focused Small-Cap Value (SSSAX), AIM Financial Services (FSFSX), and Concorde Value (CONVX).

Caveat Emptor: Research from Arnott Suggests Market Fairly Valued
A few weeks ago, we reported the views of two prominent fund managers who suggested the market was fairly valued despite the dramatic losses experienced last year. A new report by industry veteran Rob Arnott reaches a similar conclusion.

Arnott and his firm, Research Affiliates, are famous for creating a series of equity market indexes that use fundamental measures to select and weight stocks in their index. He also manages PIMCO All Asset All Authority (PAUAX).

In the report, Arnott makes the following observation:

"A handy, simple metric for the valuation of the overall equity market is today's price divided by the last 10 years of earnings. Developed by Robert Shiller of Irrational Exuberance fame, this methodology smoothes the cyclical effect of wild swings in shorter term earnings to produce a more stable measure for historical comparison purposes. What does it reveal about today's prices? In short, despite all of the pain of the past two years (previous four months excluded), we stand very near the historical average valuation level. [T]he 'Shiller P/E' of 15.8 at mid-year, up from its low of 11.8 in March, is approaching the long-term historical average of 16.4."

We think his conclusion is particularly refreshing, as few mutual fund managers (save Bob Rodriguez at FPA) are willing to be so candid:

"[W]e find it hard to become enthusiastic about 'average' market valuations."

New CEO for Janus
 Janus Capital Group (JNS) announced the departure of CEO Gary Black this week. Janus board member Tim Armour, who retired from Morningstar, Inc. (MORN) in 2008, will serve as interim CEO while the firm conducts its search for a permanent CEO. For more details on Black's departure and impact on Janus mutual funds, please see my colleague Andrew Gogerty's article from earlier this week.

Davis Selected Advisors Trims Management Fees for Multiple Funds
Multiple funds managed by Davis Selected Advisers announced management fee reductions this week.

For  Davis NY Venture (NYVTX), advisory fees for the first $3 billion in assets will be lower going forward. This means investors are set to save close to $1 million annually in fees starting July 1. While this is a significant sum, Davis did collect more than $223 million in fees during 2008, up from $165 million it collected from the fund in 2006.

Shareholders of  Clipper (CFIMX) will also see a substantial fee reduction. They currently pay an average management fee of 0.625% for assets under $1 billion and will now pay just 0.55%, more than a 10% discount.

Other Davis-advised funds were similarly affected by fee reductions as well. They include  Selected American Shares (SLASX),  Selected Special Shares (SLSSX), and  Davis Opportunity (RPEAX).

With the profitability of many asset-management firms under pressure due to declining assets, it is nice to see some firms (and mutual fund boards) are still able to reduce fees for shareholders as they recover from 2008's disappointing  losses.



Ryan Leggio has a position in the following securities mentioned above: SLASX. Find out about Morningstar’s editorial policies.