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Sector of the Week: Financials

Kevin Baker

02/04/07 - 10:19 AM EST

This week I traveled from our Florida office to TheStreet.com's main office on Wall Street. Since New York City is the financial capital of the world and, more importantly, since the Federal Reserve spoke on interest rates Wednesday, I thought it appropriate to review the performance of the financial funds this week.

In leaving short-term rates unchanged at 5.25%, the Federal Open-Markets Committee signaled happiness with an economy expected to "expand at a moderate pace" while the housing market shows "tentative signs of stabilization" and inflation is "likely to moderate."

The Fed's economic endorsement prompted the Dow Jones Industrial Average to rally to a new all-time high of 12,682.57 Thursday.

The stable outlook for rates allowed the stocks in the PHLX/KBW Bank Index to continue their bull run and approach the record high set in December 2006. From the close of trading on Thursday, Jan. 25, through the close on Thursday, Feb. 1, the average financial fund rated by TheStreet.com Ratings rose 1.56%.

(FBRSX Quote)The FBR Small Cap Financial Fund , a relatively more volatile fund, with an E-plus rating, topped our list of best performers, returning 3.18% over the five trading days reviewed.

All of the fund's holdings are U.S. stocks, with 65.2% savings & loans, 24% banks, 5.2% REITS, 5.0% diversified financial services and 0.6% insurance.

FirstFed Financial (FED Quote) and Hudson City Bancorp(HCBK Quote) are the two largest holdings, but the fund's shares in Stancorp Financial Group (SFG Quote) and Pennfed Financial Services (PFSB Quote) rose the most.

Stancorp stock gained 9.45%, hitting a new high, on a fourth-quarter earnings surprise, and Pennfed added 5.58% after an analyst upgraded New York Community Bancorp (NYB Quote), which is acquiring Pennfed in an all-stock transaction.

The Fed Feel-Good Factor
Top-performing financial funds for the week ending Feb. 1
Fund Ticker Rating Fund Type 1 Week Total Return
FBR Small Cap Financial Fund FBRSX E+ Open-End 3.18%
ProFunds Finl Ultrasector-IV FNPIX B Open-End 2.39%
Profunds Banks Ultrasector-IV BKPIX C+ Open-End 2.28%
Forward Emerald Bank & Fin-A HSSAX D+ Open-End 2.24%
Rydex Series Banking Fd-ADV RYKAX D Open-End 2.16%
Schwab Financial Svs Fund SWFFX C+ Open-End 2.11%
Davis Financial Fund-A RPFGX B- Open-End 2.10%
Rydex Series Finan Serv-Inv RYFIX B- Open-End 2.06%
FBR Large Cap Financial FBRFX D Open-End 2.06%
Morgan Stanley Fincl Svcs-A FSVAX D Open-End 2.03%
Source: Bloomberg

Next on the best-performer list is the (FNPIX Quote)ProFunds Financials UltraSector, which attempts to track 150% of the return of the Dow Jones U.S. Financial Sector Index.

Its largest holdings include financial giants such as Citigroup(C Quote), Bank of America(BAC Quote), American International Group (AIG Quote) and JPMorgan Chase (JPM Quote), and the median market cap of all holdings is $37.7 billion.

Diversified financial services account for 34.1% of assets, while banks make up 29.4%, insurance 21.6%, REITs 9.7%, savings and loans 3.3% and commercial services 0.78%.

The stocks that contributed the most to the fund's overall performance for the period include Jones Lang Lasalle(JLL Quote), which climbed 11.75% on a 21% increase in fourth-quarter profits and talk of new growth through acquisitions, and Unumprovident(UNM Quote), which was lifted 9.71% after reporting a 66% increase in fourth-quarter pretax earnings.

The one financial fund bucking the trend is the First Financial Fund(FF Quote), which fell by 0.54%. The closed-end fund's largest holdings include First Republic Bank/San Francisco(FRC Quote), UBS AG(UBS Quote) and BankUnited Financial(BKUNA Quote).

In aggregate, 48.5% of the fund's holdings are banks, 24.4% are savings and loans, 10.3% are insurance companies, 9.0% are in diversified financial services, 3.1% are REITS and 1.6% are in telecommunications. The value of its holdings actually rose during the week, notably First Republic Bank/San Francisco, which announced Monday that it's being acquired by Merrill Lynch (MER Quote).

As a result, First Financial Fund's discount to its net asset value widened. The fund's shares are now trading at a 4% discount to assets, compared with an average premium to NAV over the past year. Unlike open-end funds, which continuously issue and redeem shares, closed-end fund issue a fixed-number of shares that trade throughout the day like stocks. So their share prices can move independently of the value of their holdings. But at this level, First Financial looks a lot more attractive, since investors can pick up its holdings on the cheap.

Ironically, the First Financial Fund was the best-performing fund the last time I reviewed financial stocks for this weekly column, back on Oct. 13, 2006.

A Rising Tide Lifts Most Boats
Worst-performing financial funds for the week ended Feb. 1.
Fund Ticker Rating Fund Type 1 Week Total Return
First Financial Fund Inc FF D- Closed-End -0.54%
John Han Bk & Thrift Opp Fd BTO C Closed-End 0.30%
Diamond Hill Financial L/S-A BANCX C+ Open-End 0.72%
AXA Enterprise Glbl Fin Se-B EGFBX A Open-End 0.75%
iShares S&P Glbl Finl Sector IXG B ETF 1.02%
Fidelity Select Insurance Pt FSPCX C+ Open-End 1.09%
Legg Mason Part Fincl Srv-C SFSLX C Open-End 1.14%
Saratoga Adv Trust Fin/S P-A SFPAX C- Open-End 1.15%
RBB Senbanc Fund SENBX D- Open-End 1.21%
Wells Fargo Adv Spec Fin-A SIFEX C Open-End 1.22%
Source: Bloomberg

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