FINANCIAL services stocks – and the mutual funds that specialize in them – got two big boosts last week.
First, Washington Mutual announced plans to acquire Dime Bancorp – setting off speculation that more merger-and-acquisition activity will start to take place in the financial services sector.
Then, Alan Greenspan cut short-term interest rates – the sixth rate cut this year. The lower interest rates should encourage more Americans to borrow money from banks – for mortgages, home equity loans, credit cards and other loans.
Financial service sector funds, which had already been enjoying a good year, had a great week, and fund managers believe the good times are just beginning.
“It’s really the recognition that we’re in a period of Fed easing, and while other sectors are experiencing significant earnings weakness, financial companies are showing good earnings growth,” said Larry Puglia, portfolio manager of the T. Rowe Price Financial Services fund.
This fund is one of the top long-term performers in the sector, with a gain of 11.5 percent in 1998, 1.7 percent in 1999, 36.8 percent last year and 0.28 percent this year.
Puglia attributed the consistently good performance to the fact that he’s been with the no-load fund since inception and practices a very disciplined approach to stock-picking.
“We target companies with strong franchies and sustainable earnings growth,” he said. “We gravitate toward companies that have strong market share, strong management that has seen a few economic cycles, and a strong return on invested capital.”
Some of the top holdings in the fund include Citigroup, Hartford Financial Services Group, Marsh & McLennan, American International Group and Freddie Mac.
The independent mutual fund rating firm, Morningstar, agreed that Puglia is very disciplined, awarding the fund four stars.
“Management is an advocate of low turnover and will hold stocks as long as their valuations merit,” the Morningstar analysis reads. “The fund is well diversified across stocks and subsectors, which should help keep it out of trouble. While it’s still pretty new, this fund is worth keeping an eye on.”
The fund was launched in October 1997. Since that time, according to Morningstar, it has delivered above-average returns while taking on below-average risk.
“There are a number of themes we follow,” said Puglia. “We think insurance – particularly property and casualty insurance – is a good investment right now, because the industry is well-placed to take advantage of growing business. That’s the basis for our meaningful investments in XL Capital Ltd., AIG and Hartford.”
Another theme is the asset management business. Puglia said the fund has big holdings in Mellon and Goldman Sachs to get exposure to the growing asset management business.
“We are also investing in the mortgage business, because we think that’s another big theme,” said Puglia. “Some of our big holdings there are Fannie Mae and Freddie Mac and Washington Mutual.”
Puglia is also a big fan of Citigroup, which he said addresses many of his themes.
“We like Citi because it is a global play, with strong management; it’s got the asset management business and a strong consumer finance unit, and to top it all off, it’s putting through efficiency improvements,” Puglia said.
fund at a glance
Name T. Rowe Price Financial Services
Portfolio manager Larry Puglia
Top holdings
Citigroup
Hartford Financial Services Group
Marsh & McLennan
American International Group
Freddie Mac
Load None
Gains
2000: 36.8%
YTD: 0.28%
Assets $342 million
Minimum initial investment $2,500
Phone 1-800-638-5660
Web site http://www.troweprice.com