Corporate & Securities Law

In a recent Morningstar article, author Russel Kinnel discusses seven mutual fund bear-market horror stories.  He briefly mentions the hard-hit Legg Mason Value Fund LMVTX, as well as Schwab YieldPlus SWYPX and Regions Morgan Keegan, as those stories have been well-covered.  In this issue, he discusses some other hard-hit funds.

The first is the Eaton Vance Greater India fund, symbol ETGIX.  That fund is down negative 44.6%.  He says:

In the Morningstar FundInvestor annual guide on where not to invest, I said to be wary of Asia funds, particularly China and India funds.  I don't have any timing skill or special insight that this was the moment when China and India would take a tumble.  It's just that speculation was out of control and that makes markets vulnerable to a correction.  As it happens, it's the price of oil that turned those markets from euphoria to despair awfully quickly.  Some U.S. and European manufacturers are shifting production closer to home because fuel costs are negating the wage advantage of China and India and that's depressing the markets.  India now estimates that manufacturing production will slow to its lowest growth rate (2.9%) since 2001, and there are worries that oil prices will cause a spike in inflation which, in turn, could spur interest rates higher and hurt growth.

We've seen similar sell-offs in Mexico and Asian Tigers before, and one can make a case that China and India will rebound eventually.  That still leaves the problem that many India and China funds have absurdly high expense ratios, but at least the markets are getting to more-reasonable valuations now.

Mr. Kinnel then discusses Kinetics Market Opportunities, symbol KMKNX, which is down negative 30.7% this year.  He says:

First we saw the downside of an aggressive regional fund and now we're seeing the downside of an aggressive sector fund.  This fund smoked the competition last year with a 34% gain because of its very narrow focus on trading exchanges and asset mangers.  Now, you can see that focus comes with a price.  Big holdings in NASDAQ, CME, NYSE, and Legg Mason have pummeled the fund.  When I look at a sector fund, I want a true expert in the field, and I'm not sure that Kinetics has an edge in picking financials over the likes of Davis.

He next discusses Oppenheimer Rochester National Muni, symbol ORNAX.  It's down negative 12.6% this year.  He says:

Be wary when a bond fund doesn't just outperform -- it crushes the competition.  This fund's big weighting in tobacco bonds helped it to whomp everyone for more than 10 years.  When I wrote that I preferred Fidelity and Vanguard to Oppenheimer because Oppenheimer took some big risks, I got a number of angry e-mails.  They said that it obviously wasn't risky because it had been working for more than a decade.  In bond funds, most investors don't want to take big risks -- they want steady returns and income.  The good news is that tobacco bonds could rally.  The bad news is that the fund is now down more than 20% for the trailing year and it just lost a star -- it is down to 2 stars.  If that should begin to translate into outflows, there could be more pressure on the portfolio.

Finally, Mr. Kinnel selects Touchstone Large Cap Value fund, symbol TLCAX, which is down a negative 29.43% this year.  He says:

If you are squeamish, don't click through to the graph on this one.  The fund is off a horrific 52% for the trailing 12 months.  The story here is financials but not the same ones that are hurting the Kinetics fund.  Manager John Schneider tried to do some bottom-fishing, but the fund's huge exposure to mortgages has backfired.  Top holdings Fannie Mae FNM and Freddie Mac FRE are down 50% for the year, and the fund also owns Wachovia WB and Washington Mutual WM.  Even its forays outside financials have been brutal with names like Ford Motor F, Centex CTX, and Motorola MOT.  This shows how things can turn against a value portfolio that seems diversified and is full of recognizable names.  Just about any focused fund like this one runs the risk of taking a big hit, so you have to truly be long-term to get in.

SNSFE continues to investigate these and other funds.  Feel free to contact lawyers at SNSFE for further information.

Source:  Morningstar Advisor