Investors of all stripes were feeling
The Whitehouse Station, N.J., pharmaceutical giant plunged 26% after yanking its Vioxx pain drug for heart-safety worries. The selloff contributed to a sharp decline in the benchmark
Dow Jones Industrial Average
, of which the company is a component.
Obviously, though, that 30-stock index wasn't alone in bearing the brunt of Merck's drop. More than 310 million of the drug giant's 2.2 billion outstanding shares are spread across 920 mutual funds. Some of the biggest holders will be reaching for some industrial-strength aspirin before this episode is over.
As you would expect, pharmaceutical sector funds will be the hardest hit by Merck's fall, according to data provided by fund tracker Morningstar. Seven of the top 10 funds with the highest Merck concentration are pharmaceutical funds.
Many of those funds are smaller fish in the fund-world ocean, though. In terms of the sheer size of the hit being taken, it's the biggest funds -- led by
Fidelity Magellan -- that are feeling Merck's decline most sharply. (See chart below.)
In terms of total Merck shares, the Magellan fund is the largest holder, with just under 16 million shares. That's 0.72% of Merck's outstanding stock as of March 31. And just to show how lightning can strike twice at a fund, Fidelity Magellan is also the second-largest holder of
stock, at 1.61% of outstanding shares. Fannie, if you remember, suffered a similar drop last week over accounting issues.
With Merck having lost more than a quarter of its value in midday trading, Magellan holders were taking a $175 million bath Thursday. Of course, that's the advantage of holding a $62 billion fund: Magellan's net asset value actually rose a bit as gains elsewhere offset the Merck losses.
Proportionately, the biggest hit will be taken by some of the smallest funds. The $8 million
ProFunds UltraSector Pharmaceuticals fund had the largest exposure of all diversified stock funds as of June 30, with 9.77% of its portfolio in Merck shares. The second-largest holder of Merck shares on a percentage basis is the $76 million
Fidelity Select Pharmaceuticals fund, with 8.22% of its assets in the company. (To give you a sense of the scale of this stock, however, consider that that stake amounts to just 0.01% of Merck's outstanding shares.)
The other fund categories sure to feel pain from Merck's travails are Dow funds, which hold the stocks making up the average, and so-called Dogs of the Dow funds, which seek out high-yielding Dow stocks in the name of chasing value.
The Dow fund with the largest percentage of Merck is the $74 million
Strong Dow 30 Value fund, at 5.99% of assets. In the canine corner, the $95 million
Hennessy Total Return fund is the largest Dogs of the Dow holder, at 5.57%. Again, we're talking about small fry here: Hennessy's holdings account for just 0.01% of all Merck shares outstanding.
Morningstar analyst Amy Arnott was positive on Merck in her last report on Sept. 13, saying she "liked the company's long term outlook." Nevertheless, like many analysts, her sentiment changed based on this morning's Vioxx recall announcement. In a research note, Arnott said she is "placing our fair value estimate for Merck under review while we assess the impact of Thursday morning's news."