Skip to main content

If you own virtually any type of tech or growth fund, you started losing money Tuesday night and kept losing money on Wednesday.

That's because on Tuesday night Ontario, Canada-based

Nortel Networks



earnings that beat Wall Street analysts' lofty expectations, but disclosed that the company's third-quarter revenue fell a bit short. The news has sent Nortel shares and those of many other communications networkers plunging -- Nortel's shares were down more than 27% at midday on Wednesday. This selling will flatten many growth funds -- which have more investor dollars than any other flavor of stock fund -- because Nortel and its competitors have become core holdings in these portfolios.

Just this year the likes of Nortel,

JDS Uniphase




(GLW) - Get Corning Inc Report

have found their way into more than half of all growth funds. Networking

Cisco Systems

(CSCO) - Get Cisco Systems, Inc. Report

, down 5% in recent trading, is in a whopping 84% of big-cap growth funds as of Sept. 30, according to

TheStreet Recommends



Nearly 900 stock funds own Nortel shares today, with a hefty 25% stake in the company.

And it's easy to see why fund managers have stuffed networkers' shares into their funds. For a while now, everyone from futurist-types like George Gilder of the

Gilder Technology Review

to politicians to talking heads on


have been gushing about the ongoing buildout of the world's communications networks. Nortel and its competitors sell networking equipment to phone and Internet service providers, so they're essentially the

Home Depots

(HD) - Get Home Depot, Inc. Report

for one of the New Economy's biggest renovation projects.

These companies' rocketing earnings and portfolio managers' burgeoning affection have led to some eye-popping returns. Over the last five years, Nortel shares boast a 71.6% annualized gain, some 50 percentage points higher than the

S&P 500

, according to Morningstar. That's even higher than Cisco's 66.4% five-year annualized gain.

But those glowing figures don't reflect Wednesday's rather brutal selloff. The degree of today's selling is a reflection of the stock's steep, "priced to perfection" valuation. This was great on the way up, but is a nightmare on the way down.

It might be easier to ask which funds aren't getting smacked on Wednesday than to list which are taking a beating. Eight of the 10 largest U.S. stock funds own Nortel shares, according to Morningstar. Many are among the 10 funds that own the most NT shares, listed below.

As you can tell from this list and the stock's nearly 2% weighting in the Vanguard S&P 500 fund, Nortel has become a significant part of the S&P 500. Since that index is a benchmark for many growth funds, not owning NT shares is a fairly big risk for a fund manager to take.

Time will tell how overblown Wednesday's selling might be, but for a day at least it looked like a big risk to own these hot stocks.