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Large positions can lead to big declines


Cendant Corp. stock crashes in one day, and a number of mutual funds take a big hit -- a big hit, that is, for mutual funds.

The Parsippany, N.J., company's stock price was cut almost in half, and some mutual fund shares dropped 2 percent to 5 percent, which, in large part, explains one of the virtues of owning a mutual fund: that a Cendant is one of many shares in a fund, and so the effects of a big hit are mitigated by the performance of other stocks in the portfolio.

A word about Cendant: It was created by the merger of HFS Inc., the world's largest franchiser, and CUC Inc., the world's largest direct marketer. It owns such brands as Avis, Ramada, Century 21, Coldwell Banker and ERA. But then Cendant CEO Henry Silverman announced April 16 that accounting irregularities had been found in CUC and that profits were being written down by $115 million or more. In one day, Cendant lost half its market capitalization -- $15 billion -- as investors dumped the stock, although it has since recovered a little of that.

A number of funds had taken some large positions in the stock. It was the No. 1 holding of Putnam's Voyager and New Opportunities funds, the No. 1 holding of Morgan Stanley Aggressive Equity, the No. 3 holding of Alliance Fund, which lost $1.25 of its $49.71 share price in one day.

It was a big holding of MFS Growth Opportunities Fund, which lost 53 cents on its $15.99 price, but which MFS spokesman John Reilly said still left the fund up slightly more than the Standard & Poor's 500 index for the year.

Why didn't they see it coming? It is almost impossible for even an experienced analyst to uncover any fraud in the accounting practices of a company, said Steve Norwitz, vice president of Baltimore-based T. Rowe Price, which had three funds holding large positions in Cendant.

Now, for most long-term investors, Cendant is merely a bump in the road, and there will be more. Remember last October, when the Dow Jones average fell more than 550 points in one day. Now the market is at a high point again. So the Cendants of the market will happen, again and again.

If you only owned Cendant in one fund, it probably wasn't a big deal. But as one mutual fund manager who had heavy concentrations of the stock said: Most people don't have any idea what companies are owned by their funds.

The lesson for investors is to look inside your mutual funds, all of them, including the ones in your IRAs or 401(k)s, and see what companies they, and therefore you, own. You may find your exposure to one or more companies greater than you imagined if you add up the holdings in various funds.

It is something the experts do. We sold a very good fund, Oakmark, last year, because it had an 8 percent position in Philip Morris and we had Philip Morris in other funds and so had too much exposure to it, said Bohemia financial planner Ron Roge.

Even though annual, semi-annual and quarterly reports are generally outdated when you get them, they are a starting point. Read and compare the stock holdings in each fund, both in the same families and with all funds you own. Look at which companies are represented in the most funds and how much of that company each fund owns.

Then look at how much overlap you have, even if the funds own only small amounts of the same stock. You may discover that instead of having a diversified portfolio, you are more concentrated in one stock or in one sector than you thought.

Keep in mind that the name of the fund or even its objective does not guarantee diversity if you own a number of funds. If you find yourself loaded with one company or one sector, it may be time to rethink your asset allocation.

A few years ago, Don Phillips, president of Morningstar, the Chicago mutual fund ratings firm, pointed out that if you thought you held a diversified portfolio of stocks because you owned Fidelity Magellan, 20th Century Ultra and Seligman Communications, you really had 40 percent of your money invested in technology.

A caution on Cendant for fund buyers who are used to buying stocks on the dip: Maybe you think this is a good time to do so. But even those who are bullish on Silverman and his vision are wary about whether this is the time to buy the depressed stock, if it is depressed and not at its true level.

One fund manager, who did not want to be named, said: "Nobody can rule out more problems."

Pub Date: 5/03/98

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