Best of Breed
FBR Small Cap Financial Fund Cashes In On Banks
By Stan Luxenberg
Introduction: Financial stocks have taken their share of hits during the past year and a half. Sluggish results on Wall Street have hurt brokers and pulled down big banks that rely on trading and initial public offerings to boost earnings. But the news from the financial sector hasn't been all glum. With consumers clamoring to obtain mortgages, some lenders are thriving. In fact, demand for loans helped financial funds outpace the Standard & Poor's 500 stock index by about 12 percentage points for the 12 months ending in November. And if demand remains strong, financial stocks could climb even further.
In additing to posting competitive returns, financial funds have helped provide important diversification for investors. The avergage fund in Morningstar's financial category has an R-squared rating of only 42, suggesting that the funds are generally out of step with the S&P 500. Financial funds can be a particularly valuable complement to technology holdings, because the two sectors tend to move in different directions. In 1999 the average technology fund gained 134.6 percent, whereas the average financial fund lost about 1.2 percent. The next year technology dropped 31.6 percent, and financial funds rose 27.4 percent.
Which is the best financial fund?
