Close Close

Financial Planning > Behavioral Finance

Focus on Financials

Your article was successfully shared with the contacts you provided.

No doubt about it: 2008 was a bad year for financial services stocks. The S&P 500 financial services index registered a 60% downturn through December 15. So why does Sam Stovall, chief investment officer of Standard & Poor’s, recommend a 13% weighting toward financials (within a domestic equity allocation) for 2009?

The answer is simple. That 13% is the weighting of financial services stocks within the S&P 500.

“S&P recommends marketweighting the S&P 500 Financials sector; although S&P analysts still have a negative fundamental outlook, we believe the government’s Troubled Asset Relief Program (TARP), which has involved capital infusions into financial institutions, has lifted some of the uncertainty surrounding the sector,” says Stovall. An additional positive, in our view, includes the insuring of certain money market assets. As a result of the federal government’s efforts to stem increasing investor pessimism, we believe the worst for this sector may be over.”

There is only one financial services equity fund that makes the list of top five performers for the one-, three-, and five-year periods: FBR Small Cap Financial. As its name suggests, the fund specializes in smaller financial companies, which has helped it avoid some of the extreme damage inflicted on larger banks and insurance companies. Portfolio manager David Ellison, in place since 1996, is also not afraid to sit out bad markets. As of the end of September (the most recent period for which this information is available), Ellison had more than a quarter of the fund’s assets parked in cash.

Burnham lands two funds on the list of top performers: Burnham Financial Industries and Burnham Financial Services. The latter, Burnham Financial Services is similar to the FBR fund in that it focuses on smaller companies (generally those with market caps of less than $8 billion). Burnham Financial Industries is worth a look for clients who are ready to put their money to work in large-cap financial institutions.–Beth Piskora