NEW YORK — Investors fishing mutual-fund statements from the mailbox might take a look at their neighbors' homes and wonder whether any will cost them money.
Mounting difficulties among lenders that originate mortgages for people with poor credit have drawn concern on Wall Street and provided fodder for alarming headlines about mortgage defaults. But many mutual funds might have shied from investing in the lenders because small market capitalizations can make it difficult for a mutual fund to park a decent amount of money in such companies. Plus, most mutual funds rely on diversity to help reduce risks from such blowups.
If companies such as New Century Financial and Accredited Home Lenders Holding Co. were to go under because of a rise in mortgage defaults, questions will inevitably arise about the financial fallout. Experts say properly diversified mutual funds should offer some protection from trouble among so-called subprime lenders.
People are also reading…
"Diversity is what saves you from an event like this," said Jeff Tjornehoj, a senior analyst at Lipper Inc., which tracks mutual funds. He noted it is too soon to tell whether some funds might have dropped their investments in the space before the stocks began to fall sharply in recent weeks.
"Some of the worst offenders among subprime lenders were generally not considered sizable holdings," he said.
Harry Clark, president of Clark Capital Management in Philadelphia, said many funds would have already avoided subprime lenders.
"A lot of funds have pieces of them," he said, "but I don't think a lot of funds have big chunks of them because they're pretty risky to start with."
Tjornehoj contends most mutual-fund investors shouldn't worry unless they were in a specific sector fund, such as the Fidelity Select Home Finance Fund, which is down about 5.7 percent so far this year.
"It's extremely sector-specific. It's almost like you're overweighting in subsectors," Tjornehoj said. "If you are that invested into a sector you darn well better keep your eye on the ball at all times."
Andrew Gunter, an analyst at investment-research provider Morningstar Inc., notes that some funds might suffer temporary hits because some investors have rushed to sell stocks of a wide range of lenders and even of home builders.
"It might be a case of throwing out the baby with the bath water. Their worries about subprime lenders might have been overblown."
Gunter noted, for example, that the FBR Small Cap Financial Fund is a good fund that has struggled within its specialty financial category this year. So far this year, the fund is down 6.88 percent, though its three-year annualized return is 3.87 percent and its five-year annualized return is 12.91 percent.