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Value Line’s Financial Services objective group is a collection of funds that has 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. You 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 (Putnam Global Financial A, PGFFX), as well as those that use an index approach (ProFunds Financial UltraSector Investor, FNPIX, and, of course, Vanguard Financials Index, VFAIX). So, despite the apparent narrowness of the group’s breadth, there is still quite a bit of diversity in the group.

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 August 30, 2013, the group had an annualized gain of 2.6%, while the S&P 500 achieved a gain of 7.1%. For the five- and three-year periods through August 30th, the group had annualized gains of 3.2% and 13.6% respectively, while the S&P 500 reported annualized gains of 7.3% and 18.4%, respectively. During the past year, the Financial Services group reported a gain of 27.7 % compared with a gain of 18.7% for the S&P 500. 

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. 

Fund Name: Diamond Hill Financial Long-Short A
Ticker: BANCX
Year-to-Date: 25.91%
Investment Advisor: Diamond Hill Capital Management, Inc.
Benchmark: S&P 1500 SuperComposite Financials Index
Objective: To provide long-term capital appreciation.
Investment Strategy:
• Invests at least 80% of its net assets in U.S. equity securities of banks, thrifts, specialty lending institutions, insurance companies, real estate investment trusts and other financial services companies that the advisor believes are undervalued.
• Focuses on estimating a company’s value independent of its current stock price. 
• Considers the level of industry competition, regulatory factors, the threat of technological obsolescence, and a variety of other industry factors.
• Not constrained by the sector or industry weights in the benchmark.
• Will also sell securities short. The frequency of short sales will vary substantially in different periods, and it is not intended that any specified portion of the fund’s assets will as a matter of practice be invested in short sales. The fund will not make a short sale if, immediately before the transaction, the market value of all securities sold short exceeds 40% of the value of the fund’s net assets. 


Fund Name: Alpine Financial Services Fund A
Ticker:ADAFX
Year-to-Date: 24.11%
Investment Advisor:  Alpine Woods Capital Investors, LLC
Benchmark: NASDAQ 100 Financial Services Index; Lipper Financial Services Funds Average
Objective: Seeks long-term growth of capital and consistent above average total returns as compared to those typical of investments made in public equities.
Investment Strategy:
• 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.
• Invests a substantial percentage of its net assets in equity securities issued by banks that the adviser believes have strong growth prospects or takeover potential.
• May invest without limitation in the securities of foreign issuers that are publicly traded in the United States or on foreign exchanges.
• Pursues a value-oriented approach.
• May have a portfolio turnover rate in excess of 150% on an annual basis.
• May invest a portion of its assets in shares of initial public offerings and secondary offerings.


In the table below, we have listed 10 top-performing funds through August 30, 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 

Diamond Hill Financial Long-Short Fund A  

BANCX 

25.91 

-2.68 

1.96 

13.25 

7.46 

  

Alpine Financial Services Fund A 

ADAFX 

24.11 

-2.80 

3.15 

12.66 

  

  

J Hancock Financial Regional Bank Fund A 

FRBAX 

22.81 

-4.33 

5.63 

14.82 

7.66 

  

Fidelity Select Insurance Fund 

FSPCX 

22.62 

-3.77 

0.80 

11.35 

8.53 

  

Fidelity Select Banking Fund 

FSRBX 

21.30 

-4.02 

4.19 

13.81 

5.35 

Legg Mason Financial Services A 

SBFAX 

20.58 

-3.35 

4.39 

12.06 

8.13 

Emerald Banking & Finance A  

HSSAX 

20.35 

-3.08 

7.40 

12.95 

4.51 

Burnham Financial Services Fund A  

BURKX 

19.61 

-3.36 

7.16 

11.52 

7.78 

ALPS/Red Rocks Listed Private Equity Fund A  

LPEFX 

18.87 

-2.40 

2.17 

7.01 

-0.38  

J Hancock Financial Industry Fund A 

FIDAX 

19.34 

-3.91 

0.62 

10.02 

4.79 

Financial Services Objective Group 

  

17.46 

-3.96 

0.62 

9.36 

3.22 

  

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