Fund managers smacked by bets on Goldman Sachs

Portfolio managers at Wells Fargo Funds Management LLC, The CGM Funds and Matthew 25 Fund Inc. may be wondering if placing such big bets on The Goldman Sachs Group Inc. was a good idea. These firms all have mutual funds with substantial holdings in the firm, which last week was sued by the Securities and Exchange Commission. The suit alleges that the bank sold collateralized debt obligations without telling buyers that a hedge fund had helped select the subprime mortgages included in them. The commission also claims that the bulge bracket firm failed to inform investors that the hedge fund, Paulson & Co., was placing bets that the CDOs would decline in value. Natixis CGM Advisor Targeted Equity Fund Ticker:(NEFGX), which is a clone of the CGM Focus Fund Ticker:(CGMFX), had 8.3% if its assets invested in Goldman Sachs as of Feb 28, according to Morningstar Inc. The CGM Focus Fund had 8.2% of its assets invested in Goldman as of the end of last year, which is the latest data Morningstar has. The funds' portfolio manager, Ken Heebner, is known for placing very big bets on single companies and getting out of them quickly, an expert said. “It's not surprising that he would have a big stake in Goldman, because he tends to make big bets and then trades very quickly,” David Kathman, a mutual fund analyst at Morningstar, said. “It's definitely risky to take bets on a single company.” Goldman Sachs is also the top holding of Wells Fargo's Advantage Large Company Growth Fund, which had 8% of assets in the Wall Street firm as of the end of March. Likewise, Wells Fargo's Advantage Specialized Financial Services Fund Ticker:(SIFEX) also had 6.6 % of assets invested in Goldman, making it a top holding. “The portfolio management team of each fund is clearly aware of the issues impacting these securities and will make any decisions with respect to such securities based upon their individual investment disciplines and the particular investment policies of the fund they manage,” said Peter Greenley, a spokesman for Wells Fargo Funds. The Matthew 25 Fund Ticker:(MXXVX) had 8% of total assets in Goldman as of the end of last year, according to Morningstar. Mr. Heebner and Mark Mulholland, the portfolio manager of the Matthew 25 Fund, didn't return calls by press time asking if they had sold their holdings. On Friday after the SEC lawsuit was announced, Goldman' stock price plummeted more than 20 points, closing at 161. The controversy surrounding Goldman has some experts wondering if portfolio managers may think twice before placing such large bets on one company — particularly one in an industry befallen by crisis and regulatory reform. “This is one of those stocks that everyone thought was bulletproof,” said Harry Milling, a mutual fund analyst who specializes in financial services at Morningstar. “As the Obama administration tries to push through regulatory reform for the financial sector, it will lead to portfolio managers' questioning all of their financial holdings.”