Big Auto Stakes Are Parked in These Funds

The Big Three are hanging on by their fingertips. Mutual funds holding large stakes in the auto makers are betting they can eventually claw their way back.

With General Motors (GM) shares down to less than $5 apiece and Ford Motor (F) under $3, it isn't looking good for the American automobile industry -- unless you're a contrarian. Several fund managers known for going against the grain have either stuck with or initiated positions in the struggling companies.

Meanwhile, auto execs are landing on Capitol Hill this week (sans corporate jets, we hope) to again plead for a taxpayer-funded rescue. The industry at large will likely report bad monthly sales numbers Tuesday afternoon, which may boost Detroit's case with sympathetic politicians.

But at this point who knows what good a bailout would do for GM and Ford, other than give them a bit more time to try and correct decades' worth of bad business execution.

Fund managers willing to put money on U.S. auto manufacturers tend to fall into the bargain-hunting category. The list includes some obscure small players, but also a couple of larger and historically well-performing funds such as CGM Focus (CGMFX) and Hodges (HDPMX), which both have lost more than half their value this year. The S&P 500 index, in comparison, has lost about 38%.

Interestingly, Hodges, which had a 2.29% stake in GM as of Sept. 30, still stands by its thesis. Craig Hodges, president of Hodges Capital Management and a manager on the fund, says the GM shares were purchased on Sept. 18. The stock closed that day at $11.40, so it's since lost more than half its value. Even so, "It's worth a gamble," says Hodges.

"Of course they have a lot of costs way out of whack and have to figure out a business model that works better than the one failing right now, and it's definitely failing," he says. "But most companies' problem is they don't have enough sales. Here's a company that has a market cap of $3 billion and [annual] sales of close to $200 billion."

Craig Hodges says his time horizon is three to five years out. But he's well aware of the near-term risk. He thinks there is still "a decent chance" GM files for bankruptcy and that any government bailout won't impact shareholders much because the company still has big labor issues to work out.

CGM Focus representatives declined to comment for this story, citing a company policy of keeping mum about specific securities. It had a 5.46% stake in Ford as of Sept. 30, making it the second-largest holder of the auto makers, according to Morningstar, behind Fidelity Select Automotive (FSAVX).

The only other fund manager on the list that we could reach was Frank Ingarra, co-portfolio manager at Hennessy Funds. The company's Total Return (HDOGX) fund had 2.83% of its portfolio in GM as of Sept. 30. The reason? Their fund is based on a quantitative formula that invests in top dividend-yielding stocks of the Dow Jones Industrials Average.

"Our formulaic process demanded that we buy it when the yield was high," Ingarra says. The process also requires that the fund hold particular stocks for about one year. Going forward, since GM eliminated its dividend earlier this year to shore up its cash position, Ingarra says "we're likely to sell."