Among the biggest beneficiaries of the recent market rally have been risky stocks, especially those with lots of leverage on their balance sheets. Airline stocks, which Morningstar's Basili Alukos recently surveyed, are a prime example.

The airline industry has been plagued with major problems for most of the past decade, resulting in a string of high-profile bankruptcies. The recession made the problem worse by damping demand, especially from profitable business travelers, and the credit freeze caused most airline stocks to plunge in the first two months of 2009. However, as the economy has shown signs of bottoming and credit has shown signs of loosening, airline stocks have risen even faster than the broad market. As of Sept. 24, major airlines were the third-best-performing stock industry over the past three months, with US Airways Group (LCC), UAL Corporation (UAUA), and AMR Corporation (AMR) (the latter two the parents of United and American Airlines, respectively) each gaining more than 95% during that time.

Back in January 2008, before the worst of the financial crisis had hit, we examined which mutual funds had the biggest percentage of their portfolio in airlines. Airline stocks had a very tough year in 2007, so it wasn't surprising that most of the funds on our 2008 list had badly underperformed their peers over the previous year. Now that these stocks are finally bouncing back, we thought it would be interesting to see which funds now have the biggest airline exposure. As in our first list, we left out specialty transportation funds such as Fidelity Select Air Transportation (FSAIX), which has nearly half its assets in airline stocks. We also left out clones of other funds on the list, as well as bond and balanced funds, focusing on diversified stock funds.

Within those parameters, the following table shows the 10 funds with the highest combined percentage of their portfolio in the "major airlines" and "regional airlines" industries. We show each fund's category, the size of its asset base, its percentile rank in its category over the past three months as of Sept. 24, and its percentile ranking in 2008.

Diversified Stock Funds with the Most Airline Exposure

Diversified Stock Funds with the Most Airline Exposure

Name	Category	Size ($M)	Airline %	% Rank Cat 3 Mo	% Rank Cat 2008
Fidelity Capital Appreciation (FDCAX)	Large Growth	5,020.1	7.62	5	50
Oppenheimer Quest IntlVal (QIVAX)	For Lg Value	591.9	7.34	21	86
Hodges (HDPMX)	Mid-Cap Growth	337.9	6.67	1	87
Leuthold Select Industries (LSLTX)	Large Growth	44.4	6.25	6	20
Fidelity Small Cap Stock (FSLCX)	Small Blend	3,196.2	5.51	5	88
Seligman Smaller Cp Val (SSCVX)	Small Blend	131.7	5.05	29	82
Vanguard Capital Value (VCVLX)	Large Blend	657.3	4.28	1	97
Aston/Veredus Agg Growth (VERDX)	Small Growth	47.3	4.27	1	80
Fidelity Small Cap Ind (FDSCX)	Small Growth	1,449.5	4.20	2	88
Federated Kaufmann LgCp (KLCAX)	Large Growth	101.4	4.16	5	7

The difference in the last two columns is dramatic. Only two of these funds beat their category in 2008, and seven of them ranked in the bottom quartile. Over the past three months, all 10 of the funds have beaten their categories, with eight of them ranking in the top 10%. (The year-to-date numbers are also good but not quite as impressive; eight of these 10 funds have beaten their categories for the year to date, with four landing in the top decile.)

These funds' airline stakes are not solely responsible for this dramatic reversal, but they've undoubtedly contributed, and they illustrate what's going on in a larger sense. Most of these funds are more volatile than their peers, and many of them feature contrarian managers who are willing to take chances on stocks that are severely beaten down. For example, Fidelity Capital Appreciation (FDCAX) manager Fergus Shiel made a lot of money at his previous fund, Fidelity Independence (FDFFX), by betting on out-of-favor tobacco stocks that later rebounded strongly. Vanguard Capital Value (VCVLX) manager Peter Higgins is an aggressive contrarian who has loaded up on financial and energy stocks since taking over the fund in June 2008. In November 2008, Hodges (HDPMX) had a 2.29% stake in General Motors, leading it to appear on our list of funds with the biggest Ford and GM stakes. While that didn't work out, several of the fund's formerly battered holdings have posted huge gains in 2009, including Crocs (CROX) and Atwood Oceanics (ATW).

This type of investing isn't for everyone. While some of these funds have pretty good long-term records, their volatility makes them prone to dramatic swings in performance such as those of the past two years. As usual in such situations, neither the outperformance of the past few months nor the terrible performance of 2008 represents what these funds are likely to do over the long term, but investors should be prepared for such extremes in the short term.