Which Funds Have Been Light on Financials?
These offerings have dodged some of the market's recent bullets.
The past couple of weeks have been full of mind-boggling news: Lehman Brothers (LEH) folds, Merrill Lynch (MER) gets swallowed up by the Bank of America (BAC), and U.S. tax-payers now have a stake in American International Group (AIG). While the news has led to rocky markets in the United States and across the globe, many funds that came into the period with light stakes in financials have ended up showing exceptional levels of foresight.
You can use the Premium Screener to zero in on funds with below-average stakes in financials relative to their category peers. (Don't have a Premium Membership? You can still use our Premium Fund Screener by taking a free, 14-day trial.) To start, we selected Distinct Portfolios Only=Yes to limit the results to one share class per fund, and then further limited the results to funds covered by Morningstar analysts. As for broad fund categories, we chose Domestic Stock (ex-specialty), International Stock and Balanced and set the sector weighting in financials to less than the category average.
Other important criteria include funds with top third performance records for the year to date as well as for the five-year trailing period, making sure that the current manager was responsible for the fund's performance during that time frame. Lastly, only funds open to new investment with below-average expense ratios and investment minimums of $10,000 or less made the cut.
To see the full list, click here. We'll highlight a handful of these funds to show how they've been weathering this year's market turbulence. Of course, we're not recommending that you swap out all your current holdings for those that are light on financials. Rather, we'd hope that this serves as a helpful way to isolate active managers who were concerned about the health of financial companies and positioned their portfolio's accordingly, which led them to hold up well in this tough environment.
Pioneer Cullen Value (CVFCX)
Large-value funds have certainly been in the eye of the storm, given value managers' propensity to hunt in the financials sector, but this fund has held up remarkably well this year. Manager Jim Cullen runs a fairly compact portfolio with a large helping of foreign stocks, and he tends to hang on to his picks for several years. Firms that make the cut tend to be in the lowest 20% in terms of price/book and price/earnings ranges in their industries, and staying lighter on financial stocks than the typical peer and focusing on large companies with strong competitive positions has helped this fund hold up well this year.
That said, it's worth noting that the fund's 15% in financial stocks was on par with the S&P 500 Index, though Cullen had positioned that stake well among six firms as of July 31, 2008. He avoided Lehman Brothers, AIG, Fannie Mae (FNM) and Freddie Mac (FRE), while J.P. Morgan Chase (JPM) and Bank of America (BAC) were larger positions. Both of these banks have held up relatively well in 2008. Cullen did get caught holding smaller stakes in stocks that have hurt performance including Merrill Lynch and Morgan Stanley (MS). Overall, however, the fund has been positioned in the financial firms that are proving to be on surer footing and has avoided those that have gone bust.
FPA Crescent (FPACX)
Steve Romick has run this moderate-allocation fund since its inception just more than 15 years ago, and his gloomy outlook on the economy has kept him away from a lot of the market's trouble spots. It has also caused him to hang on to a large cash stake. As of June 30, 2008, cash soaked up just more than 40% of assets. Around that time, Romick also expected more banks to fail due to their highly leveraged off-balance sheet items and sold many of those holdings short--a bet they'd go down. Some of his short positions included mortgage insurer MBIA (MBI) and regional bank Wachovia (WB).
We'd note that this fund hasn't looked much like its peers over the years for other reasons. For example, Romick's process leads him to small-cap companies trading at bargain prices, and he generally only stashes around 20% of assets in bonds. In the end, fitting into the category hasn't mattered. Romick has been a great defender of shareholder capital, and the fund's 2.6% loss for the year ended Sept. 18, 2008, isn't nearly as painful as the typical peer's 12.6% slip.
Brown Capital Management Small Company (BCSIX)
Compared with the value funds at the opposite end of the Morningstar Style Box, small-growth funds tend to tread lightly in financial stocks to begin with. And while the typical fund in the category recently had a 7% stake in financial stocks, the management of this fund has typically stayed completely away from financials--the fund hasn't had any exposure to this sector in recent years.
Avoiding financials was not a top-down call. Keith Lee heads up the investing efforts here, and this team looks for firms that have less than $250 million in operating revenue that can grow both revenue and earnings at double-digit rates for several years. They also favor firms with lots of cash on the balance sheet and low debt loads--the fund has a lower debt/capital ratio than the typical peer and the Russell 2000 Growth Index. In this case, financial stocks simply don't fit their criteria, and the portfolio tends to be heavily skewed toward health-care and technology stocks. While these sector bets can hurt the fund at times, the fund's lack of exposure to financials has helped keep this fund's 3.6% loss for the year to date ended Sept. 18, 2008, looking pretty minor compared with the typical peer's 15.6% tumble.
Karin Anderson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.