Mutual funds that invest in subprime mortgages are not concerned about ongoing woes in the market, according to The Wall Street Journal.

Some mutual funds have invested in subprime market seeking higher returns, and others have snapped up collateralized debt obligations. These investments can work in surprising ways and can be hard to value. The risk is now being brought to attention from the recent surge in defaults among homeowners with high-risk mortgages.

Several mutual funds hold very high-rated pieces of the subprime market. Franklin Strategic Mortgage Portfolio holds $257 million and Franklin Total Return Fund holds $929 million. The two funds hold about 19% and 17% of their assets in securities tied to subprime mortgages. 

The $2.4 billion Principal Investors Bond & Mortgage Securities fund and Schroder’s Enhanced Income Fund, with $113 million each, keep about 15% of their portfolios in subprime mortgages.

However, despite the woes in the market, mutual fund managers feel comfortable with their holdings because they are high quality and involve loans issued before 2005, when underwriting standards were more solid.

A Franklin spokeswoman said its funds holdings are primarily short-term, triple A quality securities, which have “not had the kind of default problems that investors have been concerned with.”

Bill Armstrong, a manager of the Principal Investors Bond & Mortgage Securities fund, points out that none of its holdings have been downgraded by rating firms. “We’re not looking to make any changes to the portfolio.” The fund is down 0.76% for the three months ended July 11, but up 5.5% for the year.

Hartford Income Fund is even watching the market for possible buying opportunities, and has increased its subprime mortgage holdings from 0.42% at the beginning of the year, to 1.8% at the end of last month. Bill Davison, manager of the fund, says they use “rigorous in-depth analysis” to find these opportunities. The fund is down 0.92% for three months but up 6.3% for the year.

The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.

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