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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. 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 October 31, 2012, the group had an annualized gain of 2.3%, while the S&P 500 achieved a gain of 6.9%. For the five- and three-year periods through October 31st, the group had an annualized loss of 7.1% and a gain of 5.7% respectively, while the S&P 500 reported annualized gains of 0.3% and 13.2%, respectively. During the past year, the Financial Services group reported a gain of 18.6% compared with a gain of 15.2% for the S&P 500. Year-to-date, the Financial Services objective group posted a gain of 21.8%, outperforming the S&P 500, which reported a gain of 14.3%.

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 ten months ended October 31, 2012 is Fidelity Select Consumer Finance Portfolio (FSVLX). The fund pursues its capital appreciation objective by investing at least 80% of its assets in securities of U.S. and non-U.S. companies principally engaged in banking. 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 September 30, 2012, the fund had about 73% of its assets in diversified financial services shares, 17% in REITS, 5% in non-financials, and the 5% balance in cash and equivalents.

Another fund with a relatively strong 2012 return through October 31, 2012 is Prudential Financial  Services Fund A (PFSAX). This fund’s objective is long-term capital appreciation. To achieve this objective, under normal circumstances, the fund invests at least 80% of its assets in equity and equity-related securities. These include banks, savings and loan associations, mortgage banking companies, finance companies, insurance companies, securities/brokerage firms, asset management companies, securities exchanges, leasing companies, consumer and industrial finance companies, and other companies that are primarily engaged in providing financial services. Investment in non-U.S. securities is permitted. 

Normally, the fund maintains a small percentage of its assets in cash reserves. As of September 30, 2012, the fund had 90% of its assets in financial services companies, 3% in other-than-financial companies, and 7% in cash.

A third fund with a very high year-to-date return for the 10 months ended October 31, 2012 is ALPS/Red Rocks Listed Private Equity A (LPEFX). This fund’s investment objective is to maximize total return through capital appreciation and a variable income stream. The fund pursues this objective by investing at least 80% of its assets in securities of U.S. and non-U.S. companies, including those listed on a national securities exchange (or foreign equivalent). The majority of assets are invested in private equity companies as well as derivatives, including options, futures, forwards, swap agreements and participation notes, that otherwise have the economic characteristics of the listed private equity companies. Although the fund does not invest directly in private companies, it will be managed with a similar approach: identifying and investing in long-term, high-quality listed private equity companies.

These interests may include, among others, business development companies, investment holding companies, publicly traded limited partnerships (common units), venture capital funds, venture capital trusts, private equity funds, private equity investment trusts, closed-end funds, financial institutions that lend to or invest in privately held companies, and any other publicly traded vehicle whose purpose is to invest in privately held companies.

Management selects investments from the Listed Private Equity Company universe pursuant to a proprietary selection methodology that incorporate quantitative and qualitative historical results and commonly used financial measurements such as: price-to-book, price-to-sales, price-to-earnings, return on equity and balance sheet analysis. In addition, fund managers observe the depth, ability, and turnover of company management. Lastly, it looks to allocate the portfolio directly and indirectly amongst industry sectors, geographic locations, stage of investment and the year in which the private equity firm or fund makes a commitment or an investment in a fund, asset or business.

In the table below, we have listed 10 top-performing funds through October 31, 2012 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 Consumer Finance  

FSVLX

32.82

2.23

8.59

10.39

-13.57

  

J Hancock Financial Indust. A

FIDAX

30.90

1.46

10.57

8.74

-5.30

  

Alpine Financial Services A

ADAFX

26.81

1.51

5.55

5.93

  

Prudential Fin’l Services A

PFSAX

25.74

2.48

11.73

5.33

5.37

Fidelity Adv Financial Serv. A

FAFDX

23.75

1.79

6.49

4.03

-10.90

T. Rowe Price Financial Serv.

PRISX

24.01

1.03

9.77

4.84

-3.80

Fidelity Select Financial Serv.

FIDSX

23.80

1.90

6.58

4.34

-10.02

ALPS/Red Rocks Listed Private Equity A

LPEFX

23.08

2.48

9.25

6.21

  

Fidelity Select Brokerage and Inv. Mgmt.

FSLBX

23.05

1.99

11.30

7.34

-5.43

Putnam Global Financials A

PGFFX

22.25

3.04

12.48

5.58

 

Financial Services Objective Group

  

21.82

1.27

8.59

4.82

-7.11

  

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