David Ellison banks on the American dream.
He finds the firms that help people get home loans, write checks, and save for retirement, and then he turns them into investments that help people reach their financial goals.
Mr. Ellison specializes in the stocks of banks, and his mutual funds specialize in performance that would make a banker blush.
The optimism that plays a central role in American culture is also a key ingredient in Ellison's outlook. And his strategy has helped the two funds he manages to post returns last year of 48 percent and 58 percent.
His investment style ties in with his faith that people "are basically out there trying to do the right thing," whether raising a family or running a business.
"There are millions of Americans out there trying to improve themselves," he says. And "there are tons of reasonably well-managed companies out there trying to improve." He wants to buy those kinds of companies, serving those kinds of people.
In one fund, FBR Small-Cap Financial Services (888-888-0025), he holds about 90 banks and savings-and-loan associations, most of them small. The typical company in the portfolio has a market value (the number of shares times the share price) of $150 million.
The other fund, FBR Financial Services, also buys "your basic bank and your basic thrift," but bigger, with a typical market value of $5 billion.
Last year, the funds far outpaced bank-sector averages. This year FBR Financial is up 10.9 percent, on par with similar funds. The small-cap fund lags a bit, with a 5.5 percent gain.
The two funds are only 14 months old, and their parent, Friedman, Billings, Ramsey & Co. (FBR), is hardly a household name in mutual funds. But Ellison himself has a long track record. He managed some red-hot financial-service sector funds at Fidelity Investments in the 1980s and early '90s.
His career has ridden bank stocks through times of peril and profit.
"It was scary" back in 1991, he says, when so many loans had gone bad that some analysts were writing off the entire industry's future. "I remember people telling me that financial stocks at 10 times earnings were overvalued."
Since then, banks have rebounded, based on improved management, industry consolidation (fewer players mean less price competition), and a stable, prosperous economy.
Bank earnings have soared, and investors like their stocks a lot better: Bank stocks have outperformed the Standard & Poor's 500 in recent years, and many now trade at 20 times earnings.
So is Ellison worried the great bull market in financial services may have peaked?
Hardly. He remains bullish on the next five to 10 years. He figures there's still lots of room for improvement in the way banks are managed.
And he sees an economy in middle America that's basically on track. "If you buy this fund, you're buying yourself.... If you think you're going to lose your house, your car, and your job, you don't want to own this group."
Changes in interest rates pose some risk, he concedes, since rates are the price of money - the commodity banks buy and sell. But "there's been a tremendous improvement in the ability to manage interest-rate risk," he says.
Ellison has a three-step approach to stock picking that, he says, lets him sleep at night and spend some time with his kids. He looks for:
1. High-quality management.
2. A simple earnings stream, "not a lot of moving parts ... foreign-currency trading ... or tax gimmicks."
3. Low stock prices (as a multiple of earnings), relative to other banks and thrifts.
Current picks include Fleet and BankAmerica among big banks and Richmond County Financial and Andover Savings Bank among small-caps.
The FBR funds, currently no-load, are about to add a 5.5 percent load, or sales commission, starting April 20. Investors who make an initial purchase before then, including applications mailed by April 17, will have permanent no-load status.
The funds are available directly from FBR or through fund supermarkets such as Fidelity, Schwab, and Waterhouse.