NEW YORK (CNNMoney.com) -- The collapse of the subprime mortgage market has shown its ripples on Wall Street, but experts say it's not likely to spread too far across the average investor's portfolio. Nonetheless, trouble spots exist.
In June, financial services company Bear Stearns (Charts, Fortune 500) said two of its hedge funds imploded after they made bad bets on securities backed by subprime mortgages. The subprime market, which gives home loans to borrowers with weak credit, has been roiled by rising defaults.
In May, UBS (Charts), the world's largest asset manager, shut down its in-house Dillon Read Capital Management after the hedge fund reported a $124 million loss due to bad subprime mortgage market investments.
But the subprime defaults won't hurt most bond funds, said portfolio manager David Land of Advantus Capital Management, because they invest primarily in A-grade bonds, which means that companies are likely to repay the principal and interest as promised. B- and C-rated bonds are more risky.
"Triple B bonds, which are the main area of concern, are primarily owned by hedge funds, pension plans and insurance companies, rather than bond funds," said Land.
Some of the nation's largest pension funds told CNNMoney.com that their exposure to subprime investments was minimal. Representatives for the $250 billion California Public Employees' Retirement System (CalPERS) and the $155 billion New York State Common Retirement Fund said they had little to no subprime-related holdings.
Three big bond funds have really felt the impact of subprime mortgages so far, according to Lawrence Jones, a bond fund analyst at Morningstar, which covers 1,114 taxable bond funds.
The Regions Morgan Keegan Select High Income fund had 15 percent of its assets in subprime-impacted securities in early 2007, when subprime investments saw some of their biggest losses. As a result, the fund's value has fallen 10 percent since the start of the year.
Two funds run by Fidelity Investments - its Short-Term Bond fund and Ultra-Short Bond fund - have each fallen about 1 percent year to date.
It's difficult for average investors to find out if their bond funds own subprime-related debt, said Jones, but he recommended analyzing their performance during the months of February, March and July 2007, when the subprime collapse really dragged bonds down.
If your fund discloses its holdings, credit rating agency Moody's (Charts) lists names of residential mortgage-backed bonds that are being investigated for potential downgrades. Accessing the list requires you to register with the site, but it is available here.
And it must be noted that Moody's rival Standard & Poor's apologized this week after being forced to correct the volume of bonds it said it had under review to $7.35 billion from an earlier estimate of $12.1 billion.
The subprime hit on stocks
Shares of publicly traded mortgage lenders have borne the brunt of investor dissatisfaction. New Century Financial's stock was delisted from the New York Stock Exchange before the company filed for Chapter 11 bankruptcy protection.
Accredited Home Lenders (Charts), whose shares have dropped by half since the beginning of the year, is being bought by private equity firm Lone Star. And NovaStar Financial's (Charts) stock is down 73 percent as the company struggles to stay afloat.
Financial sector stocks have the worst returns of Morningstar's (Charts) 12 sector categories so far this year, either because they have a stake in struggling lenders or have purchased mortgage-backed securities.
The major financial firms have very different subprime exposure to subprime, said David A. Hendler, a senior analyst with CreditSights, which provides credit research. He said that UBS (with its recent acquisition of PaineWebber) follows Bear Stearns as most susceptible.
"Firms like Goldman and Morgan Stanley go in and out of the subprime market, but they don't always have a big stake," he said, "Merrill has been growing their holdings recently."
Mutual funds which invest in lenders are also hurting. FBR's Small Cap Financial has fallen 13 percent so far this year, while Fidelity's Select Home Finance fund has lost 7 percent.
"In terms of stock funds, subprime has already hurt many stocks," said David Kathman of Morningstar. "But if the manager has proven themselves over a long period, we're going to stick with them."
Investors that are concentrated in financial-sector funds in homebuilding and financial services will continue to feel the turmoil over the next 18 months, said Morningstar's Jones.
Some analysts paint a bleaker picture and believe Bear Stearns is just the tip of the iceberg.
"I think we're looking at something similar to the stock market declines we saw in 2000 and 2001," said Dick Bove, a financial services analyst at Punk Ziegel. "But this time we have a huge debt bubble instead of an equity bubble."
"I don't think we can properly value those companies right now, and the fear is, of course, that they're tremendously overvalued," he said.
