3 Funds Banking on Financial Stocks

NEW YORK (TheStreet) -- Financial stocks have been rallying. With banks reporting improving earnings, financial funds have gained 14.7% this year, outdoing the S&P 500 by 4 percentage points, according to Morningstar.

Some mutual fund portfolio managers argue that financial stocks can continue climbing. The managers have big stakes in banks, insurance companies and money managers.

Funds with sizable financial holdings include Davis New York Venture (NYVTX), Haverford Quality Growth Stock (HAVGX) and Snow Capital Opportunity (SNOAX).

The bullish mutual funds are in a distinct minority. Many portfolio managers remain wary of the sector, concerned that profits could be hurt by new regulations in the U.S. and the continuing crisis in Europe. But Nate Snyder, portfolio manager of Snow Capital Opportunity, argues that the fears are excessive.

"We have endured the worst financial crisis in 70 years," he says. "The next big crisis is not likely for another 70 years. From here on, everything should improve."

Snow Capital, a large value fund, has 36.7% of assets in financials, compared to 12.4% for the S&P 500. Snyder says that many financials are cheap, based on book value -- the measure of a company's assets minus liabilities. In the past, financials typically sold for more than their book values. But now Snyder says that many solid companies sell for substantially less than their book values.

"When a stock sells for less than book, it means that investors are worried about the earnings or they question whether the business is viable," he says.

Snyder is particularly keen on life insurers, including MetLife (MET), which has a price/book ratio of 0.63, and Prudential Financial (PRU), with a ratio of 0.76. He concedes that life insurers are depressed because of headwinds they face.

The problems stem from the fact that the insurers collect premiums and invest the cash in bonds. With interest rates low these days, bond income is skimpy. But Snyder says that both MetLife and Prudential have remained comfortably profitable despite the problems.

Haverford Quality Growth

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True to its name, Haverford Quality Growth Stock only takes rock-solid blue chips that seem poised to deliver steady results for years. In the past, the fund often paid premium prices to buy champion companies. But now even the best financials sell for big discounts to the market, says portfolio manager Tim Hoyle.

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