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Investing Specialists

What's the Biggest Fund Family Doing with Financials?

American Funds' managers are sticking with their typically contrarian ways.

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The financial services sector has dominated market news over the past 12 months, ever since the subprime-mortgage market imploded and kicked off a credit crunch. As a result, the fortunes of many mortgage lenders and banks--and even some financial firms that didn't previously appear vulnerable--have taken a dramatic turn for the worse. Over the 12 months ended March 25, 2008, the typical financials fund has lost 19%. That's substantially worse than any of Morningstar's domestic diversified stock-fund categories.

The turmoil in this sector, which still has the largest weighting of any sector in major market-cap-weighted indexes such as the S&P 500, may not be over. Some fund managers have told me that financials' valuations are now appealing on an absolute basis, but some skippers are concerned that further large write-downs as a result of losses on lower-quality loans could yet drive down earnings prospects and book values to an even greater degree. Thus, current price multiples could be quite misleading. Other managers, however, believe the vast majority of the subprime-related damage has been reported, at least in certain cases, and are beginning to wade into the sector.

Given financials' uncertain prospects, I think it's useful to examine what the sharp investing minds at American Funds are doing. The firm's funds generally boast excellent long-term performance and are run by a very large staff of experienced managers and analysts. In the March issue of the American Funds Fund Family Report, I took a broad look at how the funds' holdings had changed between December 2006 and 2007's end, according to regulatory filings. Below, I'll specifically discuss the moves that American's managers have made in this troubled sector.

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