The Baltimore Sun

As Wall Street tried to make sense of Bear Stearns' near-collapse yesterday, some investors began calculating their exposure to the crisis and potential losses in their mutual funds.

Companies that manage large funds, including Baltimore's Legg Mason Inc., Vanguard Group Inc. and Fidelity Investments, plowed millions of dollars into Bear Stearns. They are likely to take a beating on their holdings, but the impact is not cut and dried. Most mutual funds have minimal exposure to Bear Stearns in their portfolios, although some carry larger stakes.

But the bailout of Bear Stearns is spreading across the broader market and it hurt the stocks of other financial firms yesterday, worrying many investors about future losses. Some clients called their money managers yesterday after having seen their portfolios suffer declines during recent months. And amid talk of a recession, consumers feel squeezed by those losses and higher bills for energy, food and other costs.

Taken together, yesterday's developments left several investors concerned about wider economic repercussions.

"The good news is that we're talking only a dozen or so funds with a meaningful exposure to Bear Stearns," said Jeff Tjornehoj, a senior research analyst at mutual-fund tracker Lipper Inc. "On the other hand, if you end up holding [mutual funds with a larger exposure], you have a sick feeling in your stomach this morning."

Several clients yesterday called Timonium financial planner David Berman to find out if they owned Bear Stearns through their mutual fund holdings. Some had heard that Legg Mason Value Trust had a sizable position in the stock, Berman says, and they wanted to measure their losses.

Legg Mason money manager Bill Miller's Value Trust Fund - whose 15-year streak of beating the Standard & Poor's 500 stock index ended in 2006 - owned 2.3 million shares, or 2 percent, of Bear Stearns as of Dec. 31.

Those shares at Friday's close were valued roughly at $69 million, compared with $203 million at the end of the year. If the $2-a-share price for Bear Stearns from J.P. Morgan Chase & Co. is approved by shareholders, that stake would be worth $4.6 million.

Value Trust's Bear Stearns stake, however, represents 1.2 percent of its total portfolio, according to documents filed with the Securities and Exchange Commission. In contrast, J.P. Morgan Chase & Co. constitutes 4.7 percent of the Value Trust portfolio's assets.

Shares of J.P. Morgan rose $3.77, or 10 percent, to close at $40.31 yesterday. Bear Stearns stock plummeted $25.19, or 84 percent, to close at $4.81.

Greg Carlson, a mutual fund analyst at Morningstar, said Value Trust's holding in J.P. Morgan could "balance out some of the loss of Bear Stearns."

Such a loss puts pressure on the fund, however. So far this year, Value Trust is down 22 percent as of Friday, compared with a 10 percent decline for the S&P; 500 index, according to Morningstar.

Collectively, Legg Mason is one of the largest shareholders of Bear Stearns. Miller's Legg Mason Capital Management also owned an additional 3.4 million shares as of Dec. 31. And Legg Mason Inc.'s Private Capital Management, a unit run by Bruce Sherman, owned 5.5 million shares, or 4.8 percent of the company.

Neither manager was available for comment yesterday.

Even among the losses, financial planners and industry analysts cautioned yesterday that investors should stick to their plan of investing for the long term.

Someone who had all his money in a single fund that was heavily invested in Bear Stearns might be concerned, says Christopher Brown, a Rockville financial planner. But most people tend to have a variety of funds, reflecting different sectors, investment styles and managers. That likely means the Bear Stearns situation won't have a great impact on their portfolios, he said.

Christine Fahlund, a senior financial planner at T. Rowe Price Associates, said market volatility is a good argument for holding mutual funds.

"Hopefully you picked funds where there are limits as to what kind of position your portfolio managers could hold in a company," said Fahlund, noting investors can find that strategy outlined in the prospectus. "Certainly there are funds out there where they don't have as much diversification as others. The key is to be looking at that before you invest."

T. Rowe Price owned 1.4 million, or 1 percent, of Bear Stearns as of Dec. 31. A spokesman said yesterday its exposure, almost all in index funds, is minimal as of Friday.

Berman, the Timonium financial planner, said many of his clients began moving out of the Legg Mason fund last fall when it began to decline. And the Price funds that his clients called about to gauge their exposure didn't own Bear Stearns.

"Bear Stearns is really not a widely held stock. It's not like a company you will see in eight out of 10 large-cap mutual funds," Berman says.

Vanguard Group's Windsor II fund held 7.8 million, or 6.7 percent, of Bear Stearns shares as of Dec. 31, according to research firm Morningstar Inc. in Chicago. But the holding made up about 1.4 percent of the fund's assets at the end of last year. The actively managed fund has $45 billion in assets.

Vanguard discloses fund holdings quarterly, and the figures in the December report may not reflect current holdings, Vanguard spokeswoman Rebecca Cohen said yesterday. The next report will be out in April.

"Our message to investors is that Windsor II is a well-diversified mutual fund," Cohen says. Besides, she adds, "1.4 percent is a very small portion of overall funds."

Overall, Vanguard holds more than 9 million shares of Bear Stearns, according to Morningstar, which are spread across 24 funds. That includes the Vanguard 500 Index Fund, which mirror the S&P; 500 index.

Bear Stearns represented nearly 4 percent of Fidelity Select Brokerage & Investment fund's assets as of Jan. 31, according to Morningstar.

Some mutual funds dropped holdings in Bear Stearns during recent months.

Three funds, managed by Pioneer Investments in Boston, held up to a 5.5 percent stake in Bear Stearns in their portfolios as of Jan. 31, according to Morningstar. But Pioneer Investments said in a statement yesterday that the three funds did not have a stake in Bear Stearns as of Friday.

Van Kampen mutual funds, which held about 1 percent of their assets in Bear Stearns, are no longer invested in the investment bank, said spokeswoman Erica Platt.

hanah.cho@baltsun.com eileen.ambrose@baltsun.com

Copyright © 2021, The Baltimore Sun, a Baltimore Sun Media Group publication | Place an Ad