Financials weren't the only culprit
If your fund plunged in September — OK, if your fund plunged more than everyone else's did in September — you're probably thinking it was stocked to the gills with financial stocks, such as Fannie Mae, Freddie Mac and Smith Barney, which have seen their stocks plunge below $5 a share.
But you might well be wrong. Among the large funds that had the worst downturns in September, few had big stakes in failed financial giants. Most of them were invested in food and energy stocks.
Consider Fidelity Independence, a $6.7 billion growth fund with a sterling record, at least as of midyear. The fund dropped more than 20% in the third quarter. According to Morningstar, Independence was sharply underweighted in financials, at least at the end of July. But it did have a lot of fertilizer stocks, which wilted as energy prices fell and the economy showed signs of slowing. Independence's largest holding: The Mosaic Co., a fertilizer manufacturer, which fell 16% on Sept. 29 alone.
CGM Focus, a highflying fund run by star manager G. Kenneth Heebner, took a pounding in September as well. The fund had nothing in the financial services arena. But it had a big stake in oil services firm Wetherford International. It, too, plunged about 16% amid the mayhem on the 29th.
Columbia Value and Restructuring, a fine bargain-hunting fund, also got caught in the energy vortex. Its biggest holding: Brazilian Petroleum.
Of course, a few big funds did get slapped by financials. Oakmark Select, as late as June 30, listed Washington Mutual, the defunct S&L, as its sixth-largest holding. And Legg Mason Value Prime had a 3% stake in Freddie Mac.
Disturbances in the field
In the normal course of events, a tax-free money market mutual fund has a lower yield than a taxable one. But these are not normal times.
Interest from tax-free funds, which invest in short-term municipal obligations, are free from federal and, in some cases, state income tax. That makes up for the lower yield, particularly for those in the top tax brackets.
But in the current market, tax-free funds yield far more than taxable funds — about twice as much, in fact. The average tax-free fund yields about 3.7%, according to iMoneyNet, which tracks the funds. For an investor in the 25% tax bracket, that's the equivalent of a 5% taxable yield.
Unfortunately, there's no free lunch. The higher yield comes with higher risk. Taxable yields have soared as worries about the credit crunch have forced municipal borrowers to pay as much as 10% on obligations called variable-rate demand notes.
No tax-free funds have allowed their share prices to fall below $1 per share. But remember that those higher yields do reflect higher risk.
Insurance, of sorts
Following the historic meltdown at the Reserve Primary money fund, federal regulators announced they would insure all assets in the $3.5 trillion fund industry. As details emerge, however, you might not feel quite as reassured. The rules:
• All taxable and tax-free money funds are eligible. If your fund breaks the buck after Sept. 19, you're covered for the shares you owned that date or the current number of shares you own — whichever is less.
• Only funds that decide to participate are covered. If you want to find out whether your fund is participating, you'll have to ask your fund.
• The program ends Sept. 18, 2009.
Questions? E-mail the Treasury at email@example.com.