Small Is Beautiful for Bank-Focused Mutual Funds


Financial equity-focused mutual funds struggled this year, gaining about 1%.

Two of the biggest hurdles are concerns about sluggish economic growth and whether the US Federal Reserve will announce another rate hike, possibly in December.

An increase, which would be the second since last December, would help banks’ variable lending rates rise faster than deposit rates, boosting net interest income and promoting earnings growth. But it is not known when this will happen.

Of course, financial stocks and the funds that invest in them have been waiting for years for their ship to arrive at higher rates, only to be disappointed for the most part. As this wait continues, many of these funds remain in the doldrums, although performance has improved slightly recently. Financial funds have gained around 3% over the past three months, on average.

Yet these portfolios lagged behind most other sector fund categories in 2016. That includes energy, which gained 19.3%, and technology, up about 8%, according to Morningstar. . Funds in the financial sector total about $ 35 billion, the same amount as utilities, but lower than the nearly $ 90 billion in tech funds, according to Morningstar.

The underlying performance of financial stocks this year has generally varied by market capitalization. The actions of large companies, such as


(ticker: C), struggled, down 4%. Some large regional banks have not done well either.

M&T Bank

(MTB), for example, fell 2%. And

Wells fargo

(WFC), which was rocked by a scandal after discovering last month that it opened hundreds of thousands of accounts without the knowledge or consent of customers, fell 17%.

But some of the smaller U.S. banks have overtaken the financial sector this year, aided by their exposure to the resilient U.S. economy. This has benefited funds such as the John Hancock Regional Bank (FRBAX).

Lisa Welch, the lead manager of the $ 874 million portfolio, says smaller banks have benefited from a focus on the United States and avoiding more economically disadvantaged regions, such as Europe and China. “These names have won more recognition, even in a tough pricing environment,” Welch says.

The fund has returned 8.61% this year, outperforming almost 90% of its peers. Its holdings include shares of small banks, including

Cullen / Frost Bankers

(CFR) and


(CMA). In 2016, they returned 20% or better. Texas-based Cullen / Frost is helped by stabilizing oil prices. Comerica recorded solid earnings growth in its final quarter.

Welch maintains that smaller banks have a good outlook, helped by what it expects high growth in single-digit loans over the next year.

Certain other funds, more focused on large financial institutions, had a more difficult year. The $ 150 million Prudential Financial Services (PFSAX) fund was down 7.3%. As of September 30, his biggest holdings were Citigroup, according to Morningstar. The portfolio had a much better third quarter, however, up 7.3%, helped in part by the absence of Wells Fargo.

Wells has a unique set of problems. But many other big bank stocks don’t get much credit from the stock market.

“In general, loan growth continued to average around 1% ‘quarter over quarter’ with more balanced growth in the commercial and consumer loan portfolios,” Marty noted recently. Mosby, director of banking and equity strategies and research firm Vining Sparks. third quarter results. He adds that “the deterioration in energy-related lending has eased” and that net interest income has increased for these banks.

All of this should bode well for funds that focus on large financials. There is no doubt that once the presidential election is over, investors will have a better idea of ​​what the regulatory situation might look like.

And this elusive rate hike would help banks of all sizes.

But for now at least, funds that favor smaller US-focused financials should continue to have the upper hand.

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