The 10 Biggest Bets on Homebuilders

Among the many industries to be negatively affected by the housing downturn, one of the hardest hit has been homebuilders. With housing orders way down and an upturn possibly years off because of a supply glut, all the major homebuilders have seen their profits get badly squeezed and their stock prices drop sharply. Most of the major players are struggling; as of Oct. 23, Lennar (NYSE: - ), D.R. Horton (NYSE: - ), Pulte Homes (NYSE: - ), and Centex (NYSE: - ) were all down more than 50% for the year to date and more than 30% for the trailing three months. The average homebuilder stock is down 44% for the year to date, making it by far the worst-performing industry in our database.

Mutual funds that hold a lot of homebuilder stocks have naturally been hurt by all this. Worst hit have been the specialty funds. There are two exchange-traded funds focusing on domestic homebuilder stocks, iShares Dow Jones US Home (NYSE: - ) and SPDR S&P Homebuilders (AMEX: - ), plus one conventional mutual fund focusing on the industry, Fidelity Select Construction & Housing (NASDAQ: - ). All three have had a predictably tough time this year.

Beyond those niche offerings, it's interesting to see which other funds have the most homebuilder exposure. Here are the 10 mutual funds in our database (excluding ETFs) with the largest percentage of their most recent portfolios in homebuilder stocks, along with the percentile rank of each fund's returns relative to its category so far this year. The Fidelity sector fund is near the top of the list, along with two real-estate sector funds, but after that it's a pretty mixed bag:

Franklin Real Estate Securities (NASDAQ: - )
Homebuilder Stake: 21.72
% Rank in Category (Real Estate): 99M

Fidelity Sel Construct & Housing
Homebuilder Stake: 18.65
% Rank in Category (Mid-Blend): 99

Alpine U.S. Real Estate Equity (NASDAQ: - )
Homebuilder Stake: 18.51
% Rank in Category (Real Estate): 86

Touchstone JSAM Inst Value (NASDAQ: - )
Homebuilder Stake: 10.21
% Rank in Category (Mid-Value): 100

ING Neuberger Berman Prtnrs (NASDAQ: - )
Homebuilder Stake: 8.86
% Rank in Category (Large Blend): 44

Diversified Value (NASDAQ: - )
Homebuilder Stake: 7.19
% Rank in Category (Large Value): 98

ING FMR Mid Cap Growth (NASDAQ: - )
Homebuilder Stake: 6.84
% Rank in Category (Mid-Growth): 98

Hotchkis and Wiley Mid-Cap Val (NASDAQ: - )
Homebuilder Stake: 6.69
% Rank in Category (Mid-Value): 98

Hotchkis and Wiley Small-Cap Val (NASDAQ: - )
Homebuilder Stake: 6.47
% Rank in Category (Small Value): 99

Principal Inv Prtnrs MidCap Gr II (NASDAQ: - )
Homebuilder Stake: 6.26
% Rank in Category (Mid-Growth): 97

Click here to see the complete table:

Not surprisingly, nearly all of these funds have suffered through terrible performance this year relative to their peers, with eight of the 10 ranking in the bottom 3% of their respective categories. In that sense they're the opposite of the funds with big China stakes that we looked at a couple of weeks ago, most of which are beating their categories handily this year.

The one outlier here is ING Neuberger Berman Partners Portfolio , a near-clone of the much larger Neuberger Berman Partners (NASDAQ: - ). This fund has actually beaten the large-blend category this year despite its big homebuilder stake, which manager Basu Mullick has been trimming lately due to short-term concerns. Mullick has led Partners to great results in the long term, and he isn't afraid to be contrarian at times. Of the other funds listed here, the two Hotchkis and Wiley funds have also done very well in the long term; Mid-Cap Value has beaten its category every year since 1998, though that streak will be broken this year, and Small Cap Value was in its category's top decile for five straight years before crashing in 2006. The management team behind those funds is even more explicitly contrarian than Mullick, willing to make bold bets that often work but sometimes blow up.

Some fairly prominent funds appear not far down the list. The $4.5 billion Janus Worldwide (NASDAQ: - ) has 5.64% of its portfolio in homebuilders, the 15th most in our database, but manager Jason Yee has still managed to beat the world-stock category so far this year. On the other hand, Bill Miller's Legg Mason Opportunity (NASDAQ: - ) and Ron Muhlenkamp's Muhlenkamp Fund (NASDAQ: - ) have similar homebuilder stakes (5.80% and 5.86%, respectively) and have badly trailed their categories this year. Yet both funds have great long-term records, and we still like them despite their short-term troubles. Miller and Muhlenkamp, like the other managers above, are known as contrarians who aren't afraid to stick their necks out, though Muhlenkamp, like Mullick, has been scaling back his homebuilder exposure recently for short-term reasons.

One lesson to take from all this is that, while homebuilder stocks have certainly done a lot of damage in the short term, there are some smart fund managers out there who still like their long-term prospects. In that sense, those managers are on the same page as Morningstar's stock analysts, since several of those stocks, including Lennar, KB Home, and D.R. Horton, currently sport 5-star ratings. It's entirely possible that these stocks could continue to be ugly for a while, but patient investors could be rewarded down the road.