With a slew of financial shops playing Wall Street's lucrative version of the dating game these days, financial stocks and the funds that invest in them have heated up.
Over the past three months we've seen a
flurry of mega-mergers in the financial services sector. Among several deals, giants like brokerage
and investment banks
Donaldson Lufkin & Jenrette
have been swallowed by competitors. The transactions have buoyed the financial sector fund category, which beat the
S&P 500 index in 1995, 1996 and 1997, before rising interest rates took the wind out of the sector's sails.
Many investors think more deals might be on the way as midrange and even larger financial firms realize that they need to get bigger to compete with the likes of
, the sector's undisputed heavyweight champ. Merger rumors have boosted shares of
, up 64.8% and 78.4%, respectively, this year. Financial sector funds are up 18.8% this year, more than doubling the average return of last year's darlings, technology funds.
suggested financial sector funds might be a good choice for investors interested in consolidation or the sector's long-term growth prospects (Think: baby boomers investing for retirement.). This week's
The Big Screen
follows up, giving you a handful of funds to examine.
To make our list, a financial sector fund had to beat its category average this year plus over the past three years and have the same manager during that period. It also had to sport an expense ratio below the category's 1.72% average. We came up with four funds out of 35, and here they are, sorted by their returns since Jan. 1.
Before we get started, keep in mind these funds -- like all sector funds -- probably aren't a good idea unless you're a long-term investor. Since sector funds invest in just one part of the market, they're more like a stock investment than a diversified fund. But if you're willing to hold your investment for at least five or 10 years, you'll be able to ride out the tough times when interest rates go up and stock prices tumble.
Let's start at the top, shall we?
Craig Callahan has run the no-load
Icon Financial fund since its July 1997 inception. He has spread the fund's assets around the sector, including banks, brokerages and mutual fund companies, but held just 35 stocks at the end of June. The average financial sector fund holds about twice that many stocks, according to
The concentrated approach has led to a bit more
volatility than average, but it has also led to solid returns -- particularly this year. While the fund's 12.5% three-year annualized return barely edges the category average, its 34.6% 12-month return beats 85% of the fund's peers and the S&P 500.
At the end of June the fund held takeover-candidates Lehman Brothers and Bear Stearns among its top 25 holdings, but not recent big-name acquisitions like J.P. Morgan, PaineWebber or Donaldson Lufkin & Jenrette.
Next on the list we find two broker-sold funds run by high-profile managers:
Davis Financial and
John Hancock Financial Industries funds, which are co-managed by Chris Davis and Jim Schmidt, respectively.
Davis Financial might be a good choice for risk-averse investors who work with a broker. Chris Davis and co-manager Ken Feinberg, who joined him at the helm in 1997, don't hold many more stocks than Callahan, but they focus on solid companies they think are undervalued. That conservative approach has led to lower volatility without sacrificing returns.
The fund, which held DLJ shares according to its most recent portfolio data, boasts a 17% annualized return over the past three years. That beats more than 80% of its peers.
Schmidt has led the John Hancock Financial Industries fund's management team since its March 1996 inception, but he has also run the
John Hancock Regional Bank fund since the 1980s. That fund has lagged this year as investors have opted for faster-growing parts of the sector, such as money-management firms and brokerages.
Financial Industries is a broad portfolio of nearly 90 stocks with low turnover. Schmidt and his team spread the fund across the sector, buying companies they think are solid that might also benefit from consolidation in the industry.
So far the fund's performance has been steady, if somewhat unspectacular. Its 14% annualized return over the past three years beats the category average, but it's up nearly 28% so far this year. How good are things in the financial sector? At the end of July all but two of the fund's top 25 holdings, which included takeover-candidate Lehman, were in the black.
Finally, there's no-load
Invesco Financial Services, where manager Jeff Morris graduated from co-manager to sole manager when Dan Leonard retired this year. Morris has been with the fund since 1997.
Over the past three years the fund sports a 16.4% annualized return that beats 70% of its peers. The fund's 23.3% return since Jan. 1 is particularly impressive since Morris has had a taste for big-bank stocks that were sluggish for much of the year. Recent acquisition PaineWebber and acquirer
Chase Manhattan Bank
were among the fund's top 20 holdings at the end of June, and Morris' big-bank picks like
Bank of New York
are well in the black this year.
There you go, a short menu of financial funds to slake your thirst for Wall Street stocks.