Intel Warning a Heavy Blow to Mutual Funds

Intel Corp.’s plunge Thursday after it warned of disappointing earnings this quarter hit the mutual fund industry harder than any one-day decline by a stock in recent history.

The reason: Intel is held by more diversified U.S. stock funds than any other company, according to Morningstar Inc., a fund industry research group.

More than 730 funds own Intel shares and at least two of them recently devoted more than 10% of their assets to the world’s biggest semiconductor company, said Russel Kinnel, a senior analyst at Morningstar.

“Intel has such a broad appeal because the stock tends to trade at a modest valuation level, which attracts ‘value’ investors,” Kinnel said. “At the same time, the company is a market leader and has a tremendous franchise, which attracts the ‘growth’ investors.”

Intel fell $10.88, or 12.6%, to $75.56 after the computer chip maker warned that weak demand for personal computers will cause first-quarter earnings to fall short of expectations.

The slump hurt funds such as the Rydex OTC Fund, which has about 16% of assets invested in Intel, and the Franklin DynaTech Fund, which had about 11.5% of its assets invested in Intel as recently as Jan. 31.

The Rydex fund fell 4.6% Thursday and the Franklin DynaTech Fund declined 2.7%.

The $520-million Rydex fund attempts to mimic the Nasdaq 100 Index, and Intel accounts for about 16% of the index. Managers of the Franklin fund declined to comment.

“The Intel announcement is a wake-up call that tech stocks are overdue for a market correction,” said Michael Byrum, manager of the Rydex fund.

Intel, based in Santa Clara, may be the most widely held stock among equity funds, but it isn’t the most widely held stock in the U.S., according to analysis done by Bloomberg News. The U.S. companies that have more shares outstanding include General Electric Co., Coca-Cola Co., Philip Morris Cos., Microsoft Corp. and Wal-Mart Stores Inc.

As for holdings by mutual funds, Intel is No. 1, followed by Philip Morris, GE, Merck & Co. and Microsoft, Morningstar reported.

Intel’s earnings warning revived concern that corporate earnings growth is slowing in the U.S., said John Manley, a senior equity strategist at Salomon Smith Barney in New York.

“It’s not the first problem we’ve seen this quarter,” he said. “Our analyst on Compaq turned more negative a week or two ago.”

Companies typically warn investors about earnings shortfalls in the weeks leading up to the end of the quarter.

“Usually, companies that want to warn investors about earnings will do it now,” Manley said. “Judging by the Intel announcement, it’s safe to say it isn’t going to be a great quarter in terms of earnings growth.”

The earnings growth of companies listed on the Standard & Poor’s 500 Index will be about 5% to 8% for the three-month period ending March 31, down from a double-digit growth rate in a similar period last year, Manley said.

“The market will have to adjust to news that isn’t as good as it’s been,” Manley said. “Still, the downside risk for the market isn’t more than 8%. It isn’t more than that because interest rates are low and there’s still a lot of money around.”

Phil Rettew, a senior markets specialist at Merrill Lynch & Co., is also optimistic about the market’s prospects.

“I’m not persuaded that [the Intel announcement] is the beginning of a disaster,” Rettew said. “I’ve been expecting weakness, but I don’t expect the market to go down more than 3% to 5% from its high.”