Funds flee Tyco

February 6, 2002: 4:54 p.m. ET

In this Enron-obsessed market, mutual funds have been selling Tyco first and asking questions later.
By Staff Writer Paul R. La Monica

NEW YORK (CNN/Money) - As Tyco International shares have plunged in recent weeks, only one Wall Street brokerage house -- Legg Mason -- has openly downgraded the stock. But it's clear that an even more important group, mutual fund managers, have lost some of their love for the company.

Tyco's stock has plunged 56 percent so far this year...and that's after taking today's 12.2 percent jump into account. Tyco held another conference call today to address continued concerns about accounting and recent credit downgrades. That seemed to allay the fears of some investors. (see "Tyco comes clean")

Several market sources have been blaming hedge funds and short sellers for fueling the huge drop in Tyco's stock. (Short sellers bet that a stock will go down.) But given the large trading volume lately it's difficult to imagine that only short sellers are responsible for the bloodletting.

Over the past ten days, average trading volume for Tyco has been 78.2 million shares, well ahead of its three-month average of 23.6 million shares. So who's been selling?

American Express leaves home without Tyco
American Express has essentially sold off its entire Tyco position in two of its funds. A spokesman for American Express's fund group in Minneapolis said that the AXP Focus 20 Fund no longer owns Tyco and that the stock now accounts for less than 0.5 percent of the AXP Partners Fundamental Value Fund.

As of Dec. 31, Tyco was the largest holding in the AXP Focus 20, accounting for 8.5 percent of the fund's assets, according to Morningstar. It was also the AXP Fundamental Partners Fund's largest holding, making up 8.3 percent of assets.

The AXP Fundamental Partners Fund is managed by Christopher Davis on a sub-advisory basis. Davis also runs the Davis New York Venture Fund, also a big shareholder in Tyco. As of Dec. 31, Tyco accounted for 7.4 percent of the assets in Davis New York Venture, making it the fund's largest holding. The fact that Davis sold shares for American Express could be an indication that he also sold for Davis New York Venture, but Davis did not return calls seeking comment.

Large fund companies like Fidelity, American Century and Janus are all listed in the latest Morningstar data as owning sizable stakes of Tyco in various funds. However, spokespeople for the three firms declined to comment when asked if they had been selling shares of Tyco.

Some funds continue to support Tyco
Not everyone has bailed. Brian Mattes, a spokesman for Vanguard Funds, says that Tyco is held by several funds in the Vanguard family but that managers have not been dumping the stock.

Kent Mergler, president of Northstar Capital Management and manager of the Fremont New Era Growth fund, says he is still holding onto his stake in Tyco. He said, however, that he could see why larger funds were seeing the need to get out. "In this environment people are scared. When there's smoke you just run."

Mergler says he has no concerns about Tyco's accounting and thinks that the stock is being unfairly bashed. That said, he doesn't see a compelling reason to buy more right now either given the prevailing negative sentiment. "It doesn't pay to go to war with the world."