Muhlenkamp Fund slowed by mortgage woes

Ronald Muhlenkamp's $2.4 billion Muhlenkamp Fund, which lost value just once in the past 12 years, is getting hurt by the shakeout in the U.S. mortgage market.

Muhlenkamp's mutual fund has dropped 4.8 percent since the start of the year, through March 6, the worst performance of 90 competing funds tracked by Bloomberg that buy shares of companies perceived as being undervalued.

Muhlenkamp counts Countrywide Financial, the biggest U.S. mortgage lender, among his 10 largest holdings.

Rising mortgage rates and falling home prices caused the proportion of subprime loans that were either delinquent or in foreclosure to reach 10 percent in December, up from about 5 percent in May 2005, according to Friedman Billings Ramsey Group of Arlington, Va.

Countrywide, which focuses on the safer, so-called prime part of the market, said recently that payments were late on almost 20 percent of the subprime loans it manages for clients.

"Their business is slowing down, but they're also in pretty good shape," Muhlenkamp said.

While his no-load fund stumbled in recent months, it rose at an average annual rate of 12 percent during the past decade, beating the Standard & Poor's 500 Index's 7.6 percent advance.

During the bear market of 2000 to 2002, the fund fell only in the last year. In 2003, the Muhlenkamp fund soared 48 percent.

Shares of the Calabasas, Calif.-based Countrywide were Muhlenkamp's fourth-largest holding at the end of December, representing 4.7 percent of assets. It's the worst-performing stock among the fund's 10 biggest positions.

Other losers for the fund were the American depositary receipts of cement maker Cemex, the fund's largest holding; property insurer Allstate; and securities firm Merrill Lynch.

Countrywide reduced its subprime loans — those to people with the worst credit histories — to $2.94 billion in December from $3.04 billion a year earlier.

Overall, new mortgages during the year rose 13 percent to $37.1 billion from $32.8 billion, and refinancings climbed 30 percent to $23.8 billion.

While the company doesn't own a large portion of subprime loans, it's the biggest subprime-mortgage servicer in the U.S., with a 9.7 percent share, according to industry newsletter Inside B&C Lending.

Muhlenkamp remains confident in Countrywide's prospects.

"If I didn't already own Countrywide shares, I would be buying the stock," he said. "We've made a lot of money on it."

Muhlenkamp, who founded Wexford, Pa.-based Muhlenkamp & Co. in 1977, held 55 stocks at the end of December, with the top 10 holdings accounting for 46 percent of assets. He's known for making industry bets and holding them for years.

Before the drop in mortgage stocks, Muhlenkamp was hurt by declines in homebuilders, which accounted for 11 percent of the fund as of December. Muhlenkamp said he wished he had sold shares of the homebuilders sooner.

"The market corrected big time," he said.