Funds Stick With GM

The automaker's woes don't stop mutual funds from holding significant stakes.
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If you're one of the many people worried that

General Motors

(GM) - Get Report

is driving straight toward bankruptcy, then you better check to see if your mutual fund is going along for the ride.

The $8.6 billion

(LLPFX) - Get Report

Longleaf Partners fund, which specializes in deep-value stocks and often dabbles in troubled companies, tops the list of funds with the most concentrated position in GM. As of Sept. 30, Longleaf held 2.5% of GM's outstanding shares, or approximately 5% of the fund's total assets, according to fund tracker Morningstar.

For most funds, 5% would be considered a huge position, but GM doesn't even rank among Longleaf's biggest holdings, coming in just outside the top 10. Longleaf's managers run a concentrated fund of 27 stocks with a 57.3% spread across its top 10 holdings. Longleaf's largest positions are in

Vivendi

(V) - Get Report

, a media company recovering from troubles of its own, at 6.8% of assets; and Mexican cement company

Cemex

(CX) - Get Report

, at 6.7%.

With so much writing on the wall regarding GM's pension, profit and market-share problems, Longleaf shareholders may be wondering why the fund's managers have been hanging on to the company's shares. Nevertheless, longtime portfolio managers Mason Hawkins and Staley Cates (a third fund manager, John Buford, left in December) have proven they can spot value, so much so that Morningstar has given the fund a full five stars. The fund has returned 8.6% annually over the past five years, 7.35 percentage points better than the

S&P 500

index. Longleaf's managers don't comment on individual holdings.

"Given the managers' long-term orientation and penchant for buying troubled companies -- General Motors, for example, dinged the fund in 2005 -- there will be periods when the fund underperforms," says Morningstar analyst Chris Traulsen. "However, its long-term record is excellent, and with its talented management, proven style, and history of doing right by its shareholders, we believe the fund has the pieces in place for continued success."

To view a video take of Gregg Greenberg's mutual fund report, click here.

Longleaf is a no-load fund with a yearly expense ratio of 90 basis points. It is closed to new investors.

Longleaf's managers choose to own GM shares based on their value-based stock-picking strategy. The three funds with the heaviest concentrations in GM after Longleaf, however, are not buying the automaker's shares by choice. The

(PDOGX)

Payden Growth & Income ,

(HDOGX) - Get Report

Hennessy Total Return, and

(HBFBX) - Get Report

Hennessy Balanced funds all employ a "Dogs of the Dow" strategy that forces them to own shares in GM. GM shares make up more than 4% of each dog-based fund.

For those unfamiliar with the concept, the dogs of the Dow are not members of an index tracking pet stocks, but rather an investment strategy that advocates buying the 10

Dow Jones Industrial Average

components with the highest dividend yields. Adherents to the dogs' philosophy believe these beaten-down stocks -- remember, yield moves inversely to price -- are undervalued and due to rally.

In 2005, an investor following the dogs of the Dow strategy lost 8.9% compared with a decline of 0.6% for the Dow itself. GM was the average's biggest loser in 2005, with a drop of 51.5%. (And with a year-ending dividend yield of 10.3%, GM will once again be on the dogs list in 2006.)

All three of the above dog-based funds were down slightly in 2005, with the Hennessy Balanced fund faring the worst, dropping 2.1%.

The

(KSOIX)

Kelmoore Strategy fund rounds out the top five funds with GM holdings, with just under 4% of its assets in the automaker, according to Morningstar. But like the dogs-based strategy, the Kelmoore fund takes a different approach to picking stocks. Instead of basing his stock selections on traditional measures like cash flow and earnings multiples, portfolio manager Matt Kelmon buys stocks that work well with his option-writing strategy. Kelmon enhances returns and counteracts losses in the fund with the cash produced from selling call options.

"I believe GM will not only survive but turn itself around," says Kelmon. "But in the meantime, I'm in it for the option premium and the implied volatility."

Kelmon's fund is up 4.3% year to date and gained 2.3% in 2005, even after taking into account its steep 2.59% expense ratio. That may not have beaten the

S&P

gain of 5%, but the fund spins off cash like crazy, yielding over 12% for investors interested in the fund's steady payouts.

On the other hand, yield-hungry investors can just buy shares of GM itself, which was recently yielding 9.6%. But somewhere down the road, there is a big possibility that GM's huge $2 annual dividend is going to be cut.