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Fund Spy

Will Big Airline Bets Keep These Funds Grounded?

Some good funds are banking on a U.S. airline industry turnaround.

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Airline stocks have been down in the dumps lately, as Morningstar stock analyst Marisa Thompson recently explained in her article, High Oil Prices Pack a Double Whammy for These Airlines. Rising oil prices have sent fuel costs through the roof, putting a major crimp in profit margins at a time when the airlines have already cut costs to the bone. Low-cost airlines such as  Southwest (LUV) and  JetBlue (JBLU), which held up much better than the big legacy carriers in the industry downturn that followed the 9/11 attacks, are now suffering as well. Air transport was one of the worst-performing stock categories in 2007, with big names such as JetBlue,  Continental (CAL), and  AMR (AMR) (parent of American Airlines) losing more than 40% of their value.

We decided to take a look at which mutual funds have the biggest percentage of their portfolios in airline stocks. The three funds with the biggest airline stakes all specialize in transportation stocks--Fidelity Select Air Transportation (FSAIX), Rydex Transportation (RYPIX), and Fidelity Select Transportation (FSRFX), with percentages of 33.04%, 19.44%, and 18.56%, respectively. To make it more interesting, we restricted our list to diversified stock funds. This eliminated the three transportation funds above plus two oddities--WorldCommodity, a natural-resources fund with less than $1 million in assets, and Kinetics Internet Emerging Growth (WWWEX), a technology fund with less than $3 million in assets.

With these restrictions in place, the following table shows the 10 diversified funds that hold the greatest percentage of airline stocks; we also show each fund's category, total assets, and percentile ranking within its category in 2007. Each of the funds on this list has at least one airline among its top 10 stock holdings.

 Biggest Airline Bets


% Rank
Cat 2007
Westcore Select (WTSLX)Mid-Growth37.612.2047
Kinetics Small Cap Opp (KSCOX)Mid-Blend1,081.08.783
Fidelity Adv Dynamic Cap App (FARAX)Lg Growth1150.78.4084
Fidelity Capital Appreciation (FDCAX)Lg Growth9,049.78.3281
Hennessy Cornerstone Growth (HFCGX)Mid-Blend813.26.2687
JHFunds2 High Income NAV (JHAQX)Mid-Blend413.36.1189
CGM Capital Development (LOMCX)Mid-Blend536.46.081
Van Kampen Value Opp (VVOAX)Lg Value249.26.0789
Legg Mason Opportunity (LMOPX)Mid-Growth7,331.05.9297
Vanguard Capital Value (VCVLX)Lg Value558.54.8295

Seven of these 10 funds landed in their category's bottom quartile in 2007, and while their airline stakes weren't entirely responsible for this poor performance, they probably didn't help.  Fidelity Capital Appreciation (FDCAX), for example, had AMR and Continental in its top 10 holdings as of Nov. 30 after manager Fergus Shiel kept adding to them all year, and those stocks were down 56% and 46%, respectively, for the year.

Two of the funds, in contrast to the others, had 2007 returns near the top of the mid-cap blend category. How did they do it? By avoiding the U.S. airlines and going with emerging-markets carriers, many of which have been red-hot.  CGM Capital Development (LOMCX) gets all of its airline exposure from one stock,  Lan Airlines (LFL), which serves much of Latin America; it was up 28% last year. Kinetics Small Cap Opportunities (KSCOX) holds only Chinese airline stocks, including  China Southern Airlines (ZNH) and  China Eastern Airlines (CEA), which rose 220% and 348%, respectively, in 2007.

It's worth noting that, despite these funds' generally dismal performance last year, there are some very good managers represented here. CGM Capital Development is managed by Ken Heebner, who was a finalist for Morningstar's 2007 Domestic Stock Manager of the Year. Among the funds that performed poorly in 2007,  Legg Mason Opportunity (LMOPX) is run by former Manager of the Year Bill Miller. His  Legg Mason Value (LMVTX) beat the S&P 500 for 15 straight calendar years, but he's had a tough time the past couple of years as his contrarian bets, including airline stocks, have failed to come to fruition. Similarly, Fergus Shiel of Fidelity Capital Appreciation and its clone  Fidelity Advisor Dynamic Capital Appreciation (FARAX) is another veteran manager with a strong track record. Several of the other managers, such as David Fassnacht of  Vanguard Capital Value (VCVLX), have lumpier records but have achieved very strong results at times.

The domestic airline industry certainly has plenty of problems, so any investment in it right now is a contrarian play. Managers like Miller and Shiel have been right on plenty of contrarian bets in the past, though they've also been wrong sometimes. It will be interesting to see which is the case here.

David Kathman does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.