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What to Do When Your Fund Owns a 'Scandal Stock'

Some good funds take a hit from WorldCom news.

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What do Marty Whitman, Wally Weitz, Tad Rivelle, Chuck Freeman, and Bill Miller have in common? They’re all great managers and they all got burned by deceptive accounting. The question I’m hearing most often from investors of late is what should they should do about a fund that got caught owning a stock in an accounting scandal. First, let’s take a look at some of the stars who made mistakes.

Whitman of Third Avenue Value (TAVFX) and Rivelle of Metropolitan West Total Return Bond (MWTRX) got "a kick in the gut" this week when WorldCom (WCOME) announced one of the biggest accounting "errors" in history. Both funds owned WorldCom debt, which still might be worth something--unlike the stock. Freeman began 2002 with sizable stakes of WorldCom shares in both Vanguard Windsor (VWNDX) and Vanguard Capital Value (VCVLX). I don’t know if he still owns them but it’s good bet given that Vanguard Capital Value’s performance is a train wreck. It’s off 22% through last Thursday--an amazing number for a value fund.

Weitz made the mistake of buying Adelphia Communications (ADELQ), the cable company that was used as a piggy bank by Rigas family members whenever they needed a loan. As a result of this and other nasty cable and communications stocks, Weitz Value (WVALX) is down 15%. Bill Miller bought Enron (ENRNQ), joining the legion of fund managers who got burned at one point or another by the former growth darling.

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