Some big-name funds may ride Fannie and Freddie to zero

With shares of mortgage giants Fannie Mae and Freddie Mac continuing their slide today to new multi-year lows, the market once again is signaling that the two companies’ common shareholders are likely to be wiped out.

If that’s the case, some big names in U.S. money management could wind up looking very embarrassed for having held on to the shares.

Then again, those managers could make a good case for staying put at this point: They’ve already lost so much, on paper, that any further loss would be incremental.

At the moment, it’s impossible to know who’s still stuck with Fannie and Freddie. Money managers are required to file their holdings with the Securities and Exchange Commission each quarter, so we know who the biggest shareholders in Fannie and Freddie were as of June 30. But a lot has happened since then -- including the first climactic plunge in the shares in mid-July -- so it’s conceivable that some of the top holders on June 30 already have bailed.

Based on SEC filings, the largest shareholders of Fannie at the end of the second quarter included French insurance titan Axa, the Dodge & Cox mutual funds in San Francisco, L.A.-based Capital Group (which manages the American Funds), Fidelity Management in Boston and Lord Abbett & Co.

Freddie’s biggest holders on June 30 included Axa, Capital Group, Legg Mason Capital Management, Pzena Investment Management and L.A.-based Hotchkis & Wiley Capital Management.

As a rule, big money managers don’t discuss the individual securities they own. But most of the largest holders of Fannie and Freddie historically have been "value" investors who tend to hold on to stocks for the long haul.

Assuming they still have Fannie or Freddie shares, these managers are holding them in diversified portfolios, so their fund investors aren’t facing catastrophic losses.

But the stocks’ presence in the portfolios obviously hasn’t helped the funds’ performance. The Dodge & Cox Stock fund, which held 39 million shares of Fannie Mae as of June 30, is down 14.5% year to date, compared with a 13.2% drop for its average peer value fund, according to Bloomberg data.

The Hotchkis & Wiley Large Cap Value fund, which had 3.4% of its assets in Freddie as of June 30, is down 20.4% year to date.

Hotchkis & Wiley in late July offered a defense of its Fannie and Freddie holdings in a commentary on its website. "We believe these companies are well-positioned to endure the current environment and offer tremendous upside potential," the firm said.

Hotchkis may yet be right. But even if it and other big holders figured the stocks could go to zero because of a government takeover that saves the companies but wipes out shareholders, there may be no point in selling now.

Fannie, at $5.86 this morning, is down 85% this year; Freddie, at $3.99, is down 88%.

Their biggest shareholders could take the view that they now hold options, not shares: If Uncle Sam takes control, the options will expire, worthless -- and you’ve already lost most of what you’re going to lose.

But if the companies survive as public firms there may be, as Hotchkis put it, "tremendous upside."

Right now, however, "tremendous upside" is a bet few other investors are willing to make.

Photos: Outside Fannie Mae's headquarters in Washington (Manuel Balce Ceneta / Associated Press) and Freddie Mac's headquarters in McLean, Va. (Chip Somodevilla /Getty Images).

Comments

[Troy Aiken]

We're Screwed

[Cheech & Chong]

I thought value investors were supposed to be able to read a balance sheet? The stooges at Dodge & Cox have really screwed up with their FNM and GM positions. Anyone who knows how to read a balance sheet would have seen these two were basically already bankrupt when D&C invested.