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Fund Spy

Will Financial Services Funds Continue to Soar in 2022?

After a hot 2021, we unpack five funds' performance.

The financial sector was among the best performers in 2021. Banks excelled amid a boom in deal-making, trading, and unwinding of loan-loss reserves. Behemoth JPMorgan Chase (JPM), for instance, recently announced record profits. Overall, the S&P 1500 Financials Index gained 35% and the average fund in the financials Morningstar Category gained 32%. These funds have continued to rise so far in 2022, while most other sectors' funds are in the red. Let’s see how the diverse group of five financial sector funds Morningstar covers have fared.

JHancock Regional Bank’s (FRBAX) 40.6% gain in 2021 was better than any financial sector fund Morningstar covers, and it beat the S&P 1500 Financials Index by 6 percentage points. True to its name, the strategy invests almost exclusively in U.S. regional banks, which provided a tailwind as regional banks outperformed larger, diversified banks and insurance firms. Good stock-picking also helped: Top holdings Fifth Third Bancorp (FITB), SVB Financial (SIVB), and Western Alliance Bancorp (WAL) gained between 62% and 82% each. The strong showing came after lackluster results from 2017 to 2019. The strategy then languished in the category’s bottom half as regional banks struggled. However, the patient approach has delivered solid total and risk-adjusted returns since longest-tenured manager Susan Curry’s 2006 start.

The same team behind JHancock Regional Bank runs JHancock Financial Industries (FIDAX), but with a broader approach. It has about 30%-50% of assets in U.S. regional banks and spreads the rest across other financial stocks regardless of location or market cap. Such diversification has typically resulted in less volatility and superior risk-adjusted returns versus peers and the S&P 1500 Financials Index. Performance in 2021 was no exception. Although several out-of-benchmark payment processors caused the strategy’s 29% gain to lag the index by 5 percentage points and land in the category’s 67th percentile, lower volatility led to risk-adjusted returns in line with peers and marginally ahead of the index.

Franklin Mutual Financial Services (TFSIX) has among the largest helpings of non-U.S. stocks in the financial category--between 45% and 55% of assets. This hurt in 2021 as U.S. banks, in which the fund had a huge underweight versus peers, outpaced most of their non-U.S. counterparts. A large turnaround bet on Credit Suisse CS also hurt as the stock lost about one fourth of its value after several governance and risk-management failures. Overall, the strategy’s 23.7% gain landed in the category’s bottom quintile and lagged the MSCI World/ Financials prospectus benchmark’s 27.9%. Relatively weak results have been the norm for this strategy amid two recent manager departures. It hasn’t cracked the category’s top half in any full calendar year since 2015. Year-to-date results in 2022 rose to the top quintile as value names have excelled, but that period is short.

A penchant for non-U.S. stocks also hurt Davis Financial (RPFGX), which seeks stocks trading at discounts to their intrinsic value estimates. It gained 31% in 2021, lagging the S&P 1500 Financials Index by 3 percentage points and finishing in the peer group’s middle. Non-U.S. holdings, including a modest position in the U.K.’s Metro Bank (MTRO), have weighed on results in the trailing three-year period as well. However, thanks to the team’s patience and decades of experience investing in the financial sector both in the U.S. and abroad, the longer-term record remains well ahead of peers and the index.

Unlike the other funds here, Emerald Finance and Banking Innovation (HSSAX) stands out for its growth, rather than value, orientation and its willingness to own cryptocurrencies and cryptocurrency-related businesses. Indeed, it directly owns more cryptocurrency than almost any strategy under Morningstar’s coverage, owing primarily to positions in Grayscale Bitcoin Trust and Grayscale Ethereum Trust, which together approached nearly 5.0% of assets in 2021. Managers Ken Mertz and Steven Russell also have significant indirect cryptocurrency exposure through trading platforms Voyager Digital (VOYG) and Coinbase (COIN) as well as multiple Bitcoin mining firms. The fund, as of November 2021, had at least 30% of assets in cryptocurrency-related investments, which are far riskier than regional banks that historically have been its core competency and used to account for 70%-80% of assets. Cryptocurrency boosted the strategy’s 39% gain in 2021, which beat the S&P 1500 Financials Index by 5 percentage points and landed in the category’s top quintile. However, double-digit losses in many top cryptocurrency holdings pushed results so far in 2022 to the bottom quintile. A recent name change, from Emerald Banking and Finance, suggests the fund’s foray into this volatile asset class is likely to continue.

Eric Schultz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.