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Fund Spy: Morningstar Medalist Edition

5 Medalists Swimming Against the Tide in Financials

These proven managers are going against the current.

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Financial stocks, particularly bank stocks, have had a long stretch of poor performance. The financial crisis of 2008 was the most painful period, of course, but the sector has often struggled since then as well. Over the past decade through Aug. 16, 2016, financial sector funds trailed the Russell 1000 Value Index and the S&P 500 by an annualized 4.4 and 5.9 percentage points, respectively. Due to renewed concerns over the accuracy of banks’ book values and their ability to generate solid returns on equity in the future, the performance gap is similar over the trailing three years (coinciding roughly with the last time the S&P’s financials weighting peaked in mid-2013), and the past 12 months stand out as a particularly trying time.

Some of our favorite U.S. large-cap equity funds see significant investment opportunities in the beleaguered sector, so they sport big financials stakes—and have seen their recent performance suffer as a result. Let’s take a closer look at those funds that earn Morningstar Analyst Ratings of Gold or Silver and have weightings in financials that at least double the S&P 500’s recent 13.8%.

 Allianz NFJ Dividend Value (NFJEX)
This large-value fund recently stashed 27.6% of its assets in financials, which is twice the S&P 500’s stake and well above the Russell 1000 Value’s 22.3% and the category average of 19.8%. Four of the fund’s largest six holdings reside in the sector: banks  JPMorgan Chase (JPM) and  Wells Fargo (WFC), and insurers  MetLife (MET) and  Travelers (TRV). The fund has owned each one since 2011 or earlier, and its conviction hasn’t wavered: The fund’s positions in each stock except Wells Fargo are larger than they were three years ago, and the overall financials stake has risen from 21.3% over that time even as the sector has lagged. The fund’s managers favor these picks for their modest valuations, recently increased returns of capital through dividends and share repurchases, and potential to benefit when interest rates (eventually) rise. The fund’s record doesn’t look good right now over periods of 10 years or less, but its highly experienced team, below-average fees, and a process that has proven itself over the full 16-year tenure of lead manager Ben Fischer support its Silver Analyst Rating.

 Invesco Comstock (ACSTX)
Lead manager Kevin Holt and company boosted this large-value fund’s financials stake from 24.2% in mid-2013 to roughly 30% three years later. The fund added to longtime holdings  Bank of America (BAC),  Citigroup (C), and JPMorgan Chase, while also purchasing auto loan originator  Ally Financial (ALLY). In the case of the big banks, the managers argue that their balance sheets are now healthy, and they also like the firms’ low valuations and increased return of capital. The managers bought Ally because they say investors have unfairly lumped it in with lenders with much lower-quality books of business. All four holdings have dented recent returns, and the fund is working on its third consecutive bottom-third showing. In addition, two managers have left the fund (and Invesco) in two years. But the fund’s contrarian instincts have led to previous slumps during Holt’s 17-year tenure, only to be followed by rebounds, and comanager Devin Armstrong, who’s worked on the team since 2004, remains on board. The fund’s relatively low costs also give it a leg up on peers. It earns a Silver rating.

JPMorgan Value Advantage (JVAAX)
This Silver-rated large-value fund has typically had a big stake in financials—it was 30.7% in mid-2013, and it’s 29.5% now. Nevertheless, manager Jonathan Simon has navigated the rise and fall of the sector fairly well during his 11-year tenure; the fund held up a bit better than its typical peer in 2008, and underperformed modestly both in 2015 and in 2016 through July 16. He’s recently favored banks over insurance companies because he finds their valuations more compelling and believes they’ll benefit more quickly from rising rates. He’s focused on better-managed banks such as Wells Fargo and  M&T Bank (MTB); the latter has a conservative lending business, he says, and it remained profitable through the financial crisis. While Simon sometimes makes more contrarian plays, such as his purchase of AIG in 2011, he has consistently emphasized quality within traditional value-investing sectors like financials, leading to strong performance during his tenure.

 Oakmark (OAKMX),  Oakmark Select (OAKLX)
Bill Nygren, the veteran lead manager of both of these Gold-rated large-blend funds, doesn’t always focus heavily on classic value stocks. Instead, he buys companies of all stripes that are trading at a big discount to his estimate of their private-market value. Indeed,  Alphabet (GOOG) (formerly Google) was Select’s top holding at the end of June 2016. But over the past three years, as bank stocks have struggled, these funds have bulked up on them—Oakmark’s weighting rose from 26.8% to 33.5%, while Oakmark Select’s grew from 27.6% to 36.0%. Nygren’s biggest financial picks recently included  AIG (AIG), Bank of America, Citigroup, and JPMorgan Chase. All are among the 11 largest holdings in both funds, and each one has contributed to the funds’ poor performance in 2015 and Select’s continued struggles in 2016. (Oakmark Fund has slightly outperformed this year.) Nygren says the firms’ operational performance and capital allocation have met his expectations, and he finds their valuations quite compelling. Experienced investors may recall that Nygren’s biggest flop during his distinguished career came in financials—a  massive weighting in Washington Mutual, which ultimately went bankrupt and resulted in very poor performance for both funds in 2007. But both funds held up well in 2008, when the financial crisis intensified. And both have surpassed more than 75% of peers over the trailing five, 10, and 15 years.

For a list of the open-end funds we cover, click here.
For a list of the closed-end funds we cover, click here.
For a list of the exchange-traded funds we cover, click here.
For information on the Morningstar Analyst Ratings, click here.

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