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Value Line’s Financial Services objective group is a collection of funds with the stated policy of investing at least 50% of assets in common stocks of financial services and related companies. Functionally speaking, most funds in the group have a much higher percentage of assets allocated to this sector. One might suspect that such a narrow mandate would result in a group that owns very similar investments, but that isn’t necessarily the case.

While the vast majority of fund offerings here can, effectively, “go anywhere” within the confines of the finance sector (Legg Mason Financial Services A, SBFAX), fund mandates range from those that invest specifically in regional banks (John Hancock Regional Bank A, FRBAX) to those that focus solely on insurance (Fidelity Select Insurance, FSPCX). There are funds with a global focus (BlackRock Global Financial Services A, MDFNX), as well as those that use an index approach (ProFunds Financial UltraSector Investor, FNPIX, and, of course, Vanguard Financials Index, VFAIX). 

As with any sector-focused investments, these funds often move roughly in tandem directionally. So, if the finance sector is out of favor, the vast majority of funds in this group will post losses. The opposite is obviously true when the sector is in favor. It is important to remember, however, that the more highly focused funds, such as ALPS/Red Rocks Listed Private Equity A (LPEFX), can move swiftly, decisively, and often counter to the broader finance industry. This can happen for several reasons, including the fact that events that impact just this subsector will have a disproportionate impact on these narrowly focused funds when compared to their broader focused brethren. Also, good or bad news about one investment in a narrowly focused portfolio with just a few names in it can result in outsized moves compared to funds with broader diversification.

Over the long term, the Financial Services objective group has been a below-average performer relative to the broader market, as measured by the S&P 500 Index. For the 10-year period ended January 31, 2013, the group had an annualized gain of 3.5%, while the S&P 500 achieved a gain of 7.9%. For the five- and three-year periods through January 31st, the group had an annualized loss of 2.6% and a gain of 8.1% respectively, while the S&P 500 reported annualized gains of 4.0% and 14.1%, respectively. However, during the past year, the Financial Services group reported a gain of 24.6% compared with a gain of 16.8% for the S&P 500. Year-to-date, the Financial Services objective group posted a gain of 6.5%, outperforming the S&P 500, which reported a gain of 5.2%.

The Financial Services objective group currently has a higher Risk Rank of 4, indicating that funds in this group might not appeal to risk-averse investors. 

One fund with a very high gain for the month ended January 31, 2013 is Fidelity Select Brokerage and Investment Management Portfolio (FSLBX). This fund’s investment objective is capital appreciation, which it hopes to achieve by investing at least 80% of its assets in securities of U.S. and non-U.S. companies principally engaged in stock brokerage, commodity brokerage, investment banking, tax-advantaged investment or investment sales, investment management, or related advisory services. Management uses fundamental analysis to assess each company’s financial condition and industry position. The fund also does a top-down study of market conditions and analysis of the economy to make investment selections.

As of December 31, 2012, the fund had about 93% of its assets in diversified financial services shares, 1% in information technology, and the 6% balance in cash and equivalents. Another fund with a strong return for the first month of 2013 is Royce Financial Services Fund (RYFSX). This fund’s investment objective is long-term growth of capital. To achieve this goal, the fund invests at least 80% of its net assets in a diversified portfolio of micro-cap, small-cap, and/or mid-cap companies principally engaged in the financial services industry. Using fundamental bottom-up analysis, the fund selects securities issued by companies that it believes have excellent business strengths and/or prospects for growth, high rates of return and low leverage, and that are trading significantly below its estimate of their current worth. As of December 31, 2012, the fund had about about 87% of its assets in financial services, 11% in industrials, and 2% in real estate. As of the same date, the fund’s top ten holdings accounted for about 24% of assets.

A third fund with a better than the objective group year-to-date return for the first month of 2013 is Alpine Financial Services Fund A (ADAFX). This fund’s investment objective is long-term growth of capital and consistent above-average total returns as compared to those typical of investments made in public equities. Under normal circumstances the fund invests at least 80% of its net assets in the equity securities of certain U.S. and foreign companies engaged in the financial services industry. These companies may include commercial and industrial banks, savings and loan associations, community savings banks and other thrift institutions, consumer and industrial finance and leasing companies, securities brokerage and investment advisory firms and insurance companies.

In particular, the fund invests a substantial percentage of its net assets in equity securities issued by banks that management believes have strong growth prospects or takeover potential. Such equity securities will primarily include common stocks and preferred stocks which the fund may acquire through direct investments or private placements. In managing the assets of the fund, the adviser (Alpine Woods Capital Investors, LLC) generally pursues a value-oriented approach. The adviser seeks to identify investment opportunities in equity securities of banks and other financial service companies that it believes are undervalued relative to the market and to the securities’ historic valuations. The equity securities of the financial institutions in which the fund invests are not subject to specific restrictions as to market capitalizations, however, it is expected that the fund’s investment program will emphasize smaller market capitalizations, including micro-cap. Factors that the adviser considers include fundamental factors such as earnings growth, cash flow, and industry and market–specific trends. The adviser expects that the fund’s investment strategy may result in a portfolio turnover rate in excess of 150% on an annual basis.

In the table below, we have listed 10 top-performing funds through January 31, 2013 that we follow in our Fund Advisor database.

10 Top Financial Services Equity Funds Performance

 

Fund Name

Ticker

% Year-to-date

Total Return

% 1 Month

Total

Return

% 3

Month

Total

Return

% 6 Month

Total

Return

% 5 Year

Total

Return

Annualized

Fidelity Select Brokerage and Investment Management  

FSLBX

10.11

10.11

14.82

27.79

-0.17

  

ALPS/Red Rocks Listed Private Equity A

LPEIX

8.91

8.91

14.87

25.45

-4.49

  

Royce Financial Services

RYFSX

8.49

8.49

12.29

21.41

4.68

Alpine Financial Services A

ADAFX

8.15

8.15

10.74

16.89

  

Fidelity Select Insurance

FSPCX

7.39

7.39

8.70

19.11

0.28

Prudential Fin’l Services A

PFSAX

6.99

6.99

13.46

26.77

11.09

Fidelity Adv Financial Serv. A

FAFDX

6.93

6.93

10.64

17.81

-6.58

Fidelity Select Financial Serv.

FIDSX

6.86

6.86

10.33

17.59

-5.64

J Hancock Financial Ind A

FIDAX

6.75

6.75

10.05

21.69

-1.03

T Rowe Price Financial Services

PRISX

6.69

6.69

9.68

20.39

0.92

Financial Services Objective Group

  

6.48

6.48

10.16

19.62

-2.59

  

At the time of this article's writing, the authors did not have positions in any of the funds mentioned.