Just over a week ago, the nation watched in horror as the space shuttle Columbia broke into pieces over Texas during its return trip to earth. While the future of the space program has been put in jeopardy, or at least called into question, funds investing in aerospace have little to worry about due to companies in this sector being well diversified into other areas, including military and defense contracts, according to experts.

Only one fund, the Fidelity Select Defense & Aerospace fund, is considered a true aerospace and defense fund. However, many aerospace and defense stocks appear in other funds as a way for managers to diversify their portfolio. Some have significant portions of their portfolio dedicated to this sector, such as the Trainer Wortham First Mutual fund, a large growth fund. Albeit small, with $33.84 million in net assets, 22.7% of the fund consists of aerospace and defense stocks, so the sector can affect the fund's performance significantly. The Fidelity Select Air Transportation fund, another small fund with $29.72 million in assets, has 27.1% of its total net assets, in aerospace and defense stocks.

Morningstar of Chicago identified 16 funds that have at least 10% of their holdings in this sector and 80 funds with just over 6% of assets in this space. New York-based Lipper's data indicates that there are 17 funds with at least 10% of their holdings in aerospace and defense, while 125 funds have at least 5% at stake in the sector. Aerospace and defense stocks make up the highest percentage of holdings in 31 funds on the Lipper list, and second most within portfolios 40 times, in terms of total net assets.

No Grounded Fleets,

Yet No Soaring Stocks

Despite comparisons to the 1986 Challenger space shuttle that exploded shortly after take-off, killing all seven aboard and leading to the grounding of manned flights for 2-1/2 years, investors showed little concern for the long-term impact of the tragedy on the market sector.

"I don't think the event will have much of an effect that we can define [for the markets]," said Don Cassidy, a senior equities analyst with Lipper. "It comes down to a debate between those who believe in continued manned space exploration versus those who think we should continue, using robots and machines. I don't hear people talking about killing the whole program."

Tom Laming, a research analyst and aerospace engineer, expects any effect on the markets to be short-term and of relatively little impact. Laming is a SVP and portfolio manager at Shawnee Mission, Kan.-based Kornitzer Capital Management, manager of The Buffalo Funds. Because space-shuttle programs do not drive the sector in good times, Laming believes the impact of the disaster will be "muted."

Although he doesn't manage an aerospace fund, Laming keeps versed in the sector because of his firsthand knowledge of the space program, as a navigation software engineer for TRW at the Johnson Space Center in Texas. Laming worked on the second through the sixth shuttle launches, including Columbia's.

The Fidelity Defense and Aerospace fund, which is 58% comprised of aerospace and defense funds, consists of holdings such as Boeing, Northrop Grumman, Lockheed Martin and Raytheon. In the days following the shuttle disaster, these stocks moved slightly up or slightly down, but there was no sell-off, as some might have suspected.

"Part of the issues with these companies is that they have so many other areas of business," Laming said. These include defense and commercial airline contracts. "Most of these programs on the commercial side are not high-unit volume [or] high margin. There is not likely to be another shuttle built. There are alternative systems to launching shuttles."

Nicolas Owens, an analyst at Morningstar, said that the business NASA gives these companies is not significant enough to determine whether a single equity will tank or soar.

Cassidy said that the large companies are not likely to be hurt significantly by the Columbia tragedy, but that some of the smaller companies may be stung if NASA alters its program's focus significantly. However, if they are smaller companies, they are less likely to have as great an impact within a portfolio, unless there is an unusually high concentration of that particular equity in a fund.

On the Defense

Laming expects the defense budget to drive the group more than "this one civilian program."

Interestingly, Cassidy pointed out that if the stocks in this aerospace and defense sector do feel the short-term brunt of concern from investors due to Columbia, it may also get a boost from a potential war with Iraq. While it is all still speculation, he said these "offsetting influences" may see a slowdown in workload from NASA orders, but an increase in orders of fighter jets, depending on how the conflict unrolls.

Copyright 2003 Thomson Media Inc. All Rights Reserved.

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