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Investing Specialists

Navigating the Markets' Minefields with American Funds

How have the funds fared in the midst of stocks' carnage?

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Upheaval in the financial sector, along with generally bad economic news, has rocked stock and bond markets all over the globe, leading to huge losses. First, a quick look at how we got here: Following the 2007 implosion of subprime mortgages and the decline of the housing market, the broader economy has slowed and credit markets have tightened dramatically (though they have lately opened up a bit). As the market for securitized mortgages dried up, large financial firms that held them--many have also used credit default swaps and other derivatives to take on more leverage and boost profits in good times--found themselves in once-unthinkably dire straits.

As a result, the landscape of the financial sector in the United States has been dramatically altered.  American International Group (AIG), Bear Stearns,  Fannie Mae (FNM),  Freddie Mac (FRE), Lehman Brothers,  Merrill Lynch (MER),  Wachovia (WB), and Washington Mutual have all either gone under, been acquired at depressed prices, or been taken over completely or in part by the U.S. government. What's more, the remaining large investment banks,  Goldman Sachs (GS) and  Morgan Stanley (MS), are becoming traditional, deposit-based banks instead of continuing as investment banks. The Federal Reserve's plan to buy troubled, marked-down mortgages from lenders in an attempt to revive the credit markets was approved by the U.S. government in early October, yet markets have become even more volatile.

In this article, I'm going to more closely examine which of American's funds were hurt the most by the blowups in financials and by which names, as well as how vulnerable your funds might be to any more turbulence from that troubled area in the near future. While financials' turmoil had less effect on the broader market in October, it's instructive to look at American's performance in that sector, given the substantial permanent loss of capital that occurred there. I'm also going to look at redemptions (which have grown by leaps and bounds across the fund industry as markets have declined) at American's funds and their ability to handle them.

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