Articles & Journals

	Articles & Journals

	This Year's Best Financial Funds Get Small 27 March 2001 - Frank Stanton Although specialty-financial funds served as excellent ballast for technology-heavy portfolios in 2000, those same offerings are now swooning with the rest of the economy. But a couple of funds have discovered that smaller banks can be beautiful when times get tough, and are rising while the rest of the category has fallen an average of 9.69% this year through Monday. By the end of 2000, the difference between the tech and financial sectors was stark. The average tech fund dropped 33% last year, while financial funds ended 2000 up an average of 27%. This year, however, the ongoing tech wreck has cast a pall over the entire economy, putting a noticeable crimp in the performance of big investment banks, brokerages, and asset managers. Charles Schwab SCH, for example, is reeling from a precipitous drop in trading volume as the bear market scares away droves of online investors. At the same time, investment banks like Goldman Sachs GS are smarting as the lucrative initial public offering market has gone bone dry. Consequently, funds like Fidelity Select Brokerage & Investment FSLBX, which had back-to-back years of knockout performance in 1999 and 2000, with help from stocks like Morgan Stanley Dean Witter MWD, has stumbled, falling 15.05% this year through Monday. Even more diversified funds like INVESCO Financial Services FSFSX, which mixes investment banks like Goldman Sachs with banking behemoths like Bank of New York BK and credit-card companies like Providian Financial PVN, has dropped amidst concerns about the credit quality of its holdings' loan portfolios. The fund is down 13.84% this year through Monday. Two specialty-financial funds, however, have bucked this year's downward trend. The Burnham Financial Services Fund BURMX is up 6% this year. Manager Anton Schutz has long steered the fund clear of the nation's larger banks and brokers, and focused instead on the small fry, such as Pacific Crest Capital PCCI. In his view, players like these could benefit the most from the recent interest-rate cuts the Federal Reserve has made so far this year because the spread between what these companies pay in interest and what they charge for their loans is widening as short-term rates fall. Fund manager David Ellison, whose FBR Small Cap Financial Fund FBRSX is the only other player in the financials category with its head above water, thinks small lenders catering to the average consumer are well positioned to thrive in this wobbling economy. These companies traditionally are more-conservative lenders, so they shouldn't suffer from the same credit-quality issues now dogging bigger commercial lenders. Focusing on conservative lenders held Ellison's fund behind most of its peers when the economy was booming in 1998 and 1999, but it's given FBR Small Cap one of the best trailing one-year records in its category, up 50.14% through Monday, now that the economy has cooled.

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