Over the past year or so we found out that some growth fund managers loved tech a bit too much. Now, some value fund managers have a dangerous crush of their own on another sector.
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Technology is most growth managers' favorite sector, accounting for some 30% of the average large-cap growth fund. That makes sense because growth managers hunt for shares of companies with fast earnings growth. Similarly, most value types, who typically hunt for bargains, are smitten with cheaper financial stocks that make up about 25% of the average big-cap value fund.
Liking many stocks in a sector is one thing, but stashing half a fund's assets in one sector can lead to more concentration and volatility than you expect or want from a stock fund that doesn't have a sector-fund label. We showed you a gaggle of tech-stuffed growth funds a couple of weeks ago. Now our I Own What?! feature has dug up nine big-cap value funds with more than 40% of their money in financial stocks.
There are some big-name funds on our list. This financial-stock fetish has helped most beat their average peer over the past year.
The $3.9 billion
Sequoia fund, which closed to new investors back in 1982 and has almost all its money in financial stocks, is up 21% over the past year, compared to a 1% loss for its average competitor. Co-managers Robert Goldfarb and William Ruane essentially model themselves on Warren Buffett, a point illustrated by the fund's more than 30% position in
, Buffet's financials-heavy holding company.
Clipper fund, whose management team won last year's coveted Morningstar Manager of the Year award and which has 44% of its money in financials, is also riding high, with a 27% gain over the past 12 months.
But not all of these funds are earning gold stars. The broker-sold
Davis Growth & Income fund, run by Andrew and Chris Davis since its 1998 launch, is down 13% over the past year. Chris Davis also runs the top-selling
Davis New York Venture fund and the
Selected American fund, both of which barely missed our cut with matching 39% positions in financial stocks. The funds are each down 13% since this time last year.
You might think these gaudy financial stakes are anomalies, but in reality they aren't out of the ordinary for these funds. Many funds in "diversified" fund categories actually have the leeway to slug most of their money in one sector if they like.
Salomon Brothers Opportunity fund, for instance, has more than half its assets in financial stocks; it averages a 49% financial-stock stake over the past three years. And the Sequoia fund's giant stake isn't that unusual when you consider that the fund has kept more than 70% of its cash in financial stocks on average over the past three years.
The problem with buying a fund that relies so heavily on one sector is it will rise and fall with that sector and not necessarily with the broader market. If the fund lives in a "diversified" category like large-cap value, however, you might not expect that concentration and volatility. The Sequoia fund, for instance, fell 17% in 1999, compared to a 21% gain for the S&P 500 and a 7% gain for the average large-cap value fund.
If we toss these funds into a pot and sift out their five favorite stocks, they're all financials. The list includes lenders
, both up more than 40% over the past year. Then there's also financial behemoths
Bank of New York
, down 18% and 13%, respectively, over the past year.
The bottom line is that most folks assume value funds are growth funds' calm cousins, meekly spreading their money among a broad range of tattered stocks and industries. Turns out value funds are just as adept at big and potentially ugly sector bets, after all.
Ian McDonald writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to
firstname.lastname@example.org, but he cannot give specific financial advice.