Can These Funds Still Soar With Airline Stocks?
It's been a good year for airlines, but plenty of risks remain.
Airline stocks have been hot lately, and some mutual funds are reaping the benefits--at least in the short term.
The recently consummated merger of United and Continental Airlines is only the latest sign of airline-industry consolidation. The combined United Continental Holdings (UAL) is now the largest airline in the world, surpassing Delta Air Lines (DAL), which vaulted to the top spot after buying Northwest in 2008. Southwest Airlines (LUV) recently announced plans to buy fellow low-cost carrier AirTran (AAI), and rumors of other possible deals have been swirling.
This wave of consolidation, driven by a desire for cost-cutting and economies of scale in a capital-intensive industry, has helped give a boost to airline stocks over the past year. Shares of United Continental are more than triple the price United parent UAL hit in October 2009, and US Airways Group (LCC) has more than doubled during that time despite a recent pullback. Southwest and Alaska Air Group (ALK) are also up substantially over the past year, as are overseas carriers such as Lan Airlines (LFL). A few airline stocks have continued to struggle, notably American Airlines parent AMR (AMR), which is in worse financial shape than its rivals.
A year ago, we looked at the mutual funds with the biggest percentage of their portfolio in airline stocks. At the time, these stocks had benefited from the market rebound in risky assets, and had bounced back strongly from the lows they hit in 2008 during the financial crisis. Given the industry's continued strong performance since then, it seems like a good time to revisit the issue.
Here are the 10 diversified nonsector mutual funds with at least $100 million in assets that keep the highest percentage of their portfolio in airline stocks, as of the most recent disclosure. Performance rankings are as of Oct. 7.
Funds With the Most Airline ExposureCategorySize ($M)Airline %% Rank Cat 1 Mo% Rank Cat 1 YrFidelity Capital App (FDCAX)Large Growth5,215.414.48458Legg Mason Opp (LMOPX)Mid-Cap Val1,870.011.783490Fidelity SmCap Stock (FSLCX)Small Blend3,718.211.245664Janus Overseas (JNOSX)For SmBlend11,753.110.64506Fidelity Independence (FDFFX)Large Growth3,909.97.12420Allianz AGIC EmMktsOpp (AOTIX)Div Em Mkts135.35.942722Legg Mason AmLdingCo (LMALX)Large Blend212.15.774641Kinetics SmCapOppsNL (KSCOX)World Stock148.15.722925CGM Focus (CGMFX)Large Growth2,786.15.61199Hodges (HDPMX)MidCap Blend314.95.57779
The top fund on this list, Fidelity Capital Appreciation (FDCAX), also topped the list a year ago. Manager Fergus Shiel's eclectic strategy is tough to pigeonhole, but he often sees opportunities in unpopular or controversial areas. Shiel has been a fan of airline stocks for several years, which has helped the fund at times and hurt it at others. As of Aug. 31, 2010, the fund's top holding was Continental Airlines, and it also held Delta and United in its top five, with US Airways and AMR in the top 25. The fund has been a strong performer over the past year, though it fell behind its large-growth peers in the September rally thanks to weak performance by several stocks, including US Airways and AMR.
For most of the funds on this list, airline stocks represent a broader preference for economically sensitive stocks, which have tended to be quite volatile this year as macroeconomic factors buffet the markets. That tendency has been especially stark in funds known for aggressive styles and bold sector bets. For example, Legg Mason Opportunity (LMOPX), in addition to its airline holdings (which included top-10 holdings UAL and Delta as of June 30), has big overweights in financial and telecom stocks. CGM Focus (CGMFX) has a very cyclical portfolio, with 16% of assets in Ford Motor (F) and another 12% in engine maker Cummins (CMI) and auto-parts firm Magna International (MG), while Hodges (HDPMX) has 40% of its assets in energy and media stocks (all as of June 30). These three funds struggled earlier in 2010 before bouncing back in the September rally, while others, such as Janus Overseas (JNOSX), have managed to stay ahead of the pack throughout the turmoil.
That willingness to pile into areas perceived as attractive, along with a certain amount of price appreciation, has led several of these funds to significantly increase their airline exposure over the past year. Fidelity Capital Appreciation topped the list with a 7.62% airline weighting a year ago, but its weighting now (14.48%) is almost twice as high. Fidelity Small Cap Stock (FSLCX) has also doubled its airline weighting while staying in the top 10, and most of the others are new to the list, having ramped up their airline exposure even more. (Hodges is the one fund here that has reduced its airline exposure.)
This approach has mostly worked pretty well, especially over the past month, when economically sensitive stocks have risen and merger talk has given an additional boost to airline stocks. Yet this situation could easily change, given the fragility of the economic recovery. Many of these funds have pretty good long-term records, but shareholders should be prepared for the likelihood of more volatility in the short term.
David Kathman does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.