BOSTON — It’s unlikely that the crisis in the subprime-mortgage market is going unnoticed by some prominent mutual fund managers.
At the end of last year, star stock picker Bill Miller of Baltimore-based Legg Mason Inc. listed the nation’s No. 1 home-loan lender, Countrywide Financial Corp. (CFC), as his 10th-largest holding in the $20.8 billion Legg Mason Value Trust (LMVTX). His investment in Countrywide accounted for nearly 3.5% of the fund’s assets.
Even though Countrywide is not overly exposed to subprime loans, shares of the Calabasas, Calif.-based company had fallen nearly 19% this year through March 14. Subprime mortgages accounted for about 7% of Countrywide’s loan originations last month.
“We are long-term investors and have high confidence in Countrywide’s management and their business,” Mr. Miller said in a statement to InvestmentNews.
At the end of 2006, Countrywide also was the No. 1 holding in the $387.8 million Weitz Hickory Fund (WEHIX), which is managed by Wally Weitz, president of the Omaha, Neb.-based adviser to The Weitz Funds. The fund’s stake in Countrywide accounted for 7.4% of its assets.
Countrywide also turned up as the No. 2 holding in the $2.03 billion Partners Value Fund (WPVLX), the $3.14 billion Value Fund (WVALX) and the $318.6 million Partners III Opportunity Fund (WPOPX), which all also are managed by Mr. Weitz.
He was unavailable for comment.
The $257 million Fidelity Select Home Finance Portfolio (FSVLX) had 11.4% of its assets in shares of Countrywide as of Nov. 30, according to the latest data available from Lipper Inc. of New York.
Another company with exposure to the subprime market, London-based HSBC Holdings PLC (HBC), accounted for 9.3% of the assets in the $1.02 billion Fidelity China Region Fund (FHKCX) as of Oct. 31, according to
Fidelity Investments.
Shares of HSBC were down 5.7% year-to-date through last Wednesday.
Fidelity generally doesn’t discuss specific stocks, said Mike Shamrell, a spokesman for the Boston-based company.
Then there are funds with investments in companies that are more exposed to the subprime market. With 1.13% of its assets in New Century Financial Corp, the $132 million AssetMark Small/Mid Cap Value Fund (AFSVX) had the highest concentration of assets in the troubled subprime lender at the end of last year, according to Morningstar Inc. in Chicago.
The subprime mortgage lender said in a filing last week that it lacks money to pay its creditors, fueling bankruptcy speculation.
The fund is subadvised for AssetMark Investment Services Inc. of Pleasant Hill, Calif., by First Quadrant LP of Pasadena, Calif.
Although funds with big stakes in companies exposed to subprime lenders got hit, Jeff Tjornehoj, a senior research analyst at Lipper, said that last week’s sell-off wasn’t a big deal for most U.S. diversified stock funds.
Should the subprime issue become a problem for a company such as Federal National Mortgage Association, a stock widely held by mutual funds, it could have broader ramifications, Mr. Tjornehoj said.
Although about 94% of Washington-based Fannie Mae’s loans conform to regular guidelines, the remaining 6% remain a question mark, according to Tom Mitchell, an analyst who follows financial stocks at Miller Tabak & Co. LLC, a New York-based institutional trading firm.
Fannie Mae could have some surprise losses from its non-conforming portfolio,” he said.
In addition, Fannie Mae’s net interest margins (the difference between the yield on its mortgage portfolio and its borrowing costs) are under pressure, given the inverted yield curve, Mr. Mitchell said.
Other observers voiced concern that subprime-lender strife could hurt shares of companies where fund managers might not expect to get hit.
“I think it will affect people in a variety of ways, including mutual fund investors, because we don’t know where in the food chain some of the equitylike pieces of the various [collateralized debt obligations] will reside,” said Lloyd Raines, a financial consultant in Stamford, Conn., who is associated with Minneapolis-based broker-dealer RBC Dain Rauscher Inc.
He cited, for instance, the 1994 sell-off in the foreign-debt markets.
Toronto-based RBC Capital Markets has had an “underperform” or “sell” rating on Cleveland-based National City Corp. for about two years, RBC analyst Gerard Cassidy said.
Until recently, National City owned a “sizable” subprime lender and still has some subprime lending on its books, he said.
“If you are a mutual fund portfolio manager, and you ‘have’ to be in stocks, then you need to go to quality,” Mr. Cassidy said. “Maybe you lower your financial exposure and stick with more health care and technology.”
