Financial-services funds soar, stand to beat market
Neil Eigen gets a charge out of the latest gains from his financial stocks.
The co-manager of two value funds for mutual-fund firm J.&W. Seligman in New York has seen the stock values of Allstate Insurance, Summit Bank, and Fannie Mae increase by as much as 50 percent over the past few months.
With gains like that, Mr. Eigen says he can relax a little. He also anticipates more gains for his value funds, now that the once high-flying technology sector - a favorite of rival growth funds - has hit the skids.
Thanks to a moderating economy and the Federal Reserve's recent decisions to raise and then leave interest rates alone, the US financial sector soared to the top of the mutual-fund heap during the third quarter. With interest rates now on hold, most financial institutions can worry a little less about their cost structure, says Dan Bandi, who heads up value investing for the Cleveland-based Armada funds.
While past performance doesn't guarantee future results in the financial sector, some analysts expect more big gains ahead. New York Investment house Donaldson, Lufkin & Jenrette sees most bank sectors at least equaling "market performance," with some selected bank stocks outperforming the market.
DLJ also forecasts that a handful of financial services should outperform the market in the months ahead. The list includes brokerage and asset-management houses, e-finance firms, life-insurance companies, real estate investment trusts, and credit-card companies.
Indeed, it was the surge in financial-service stocks that largely propelled the financial sector up almost 20 percent in the third quarter. Factors that are expected to continue to boost the financial sector in the months ahead include:
Consolidation There is a possibility of additional mergers. The proposed takeover of Summit Bank (in New Jersey) by New England-based Fleet Bank is one example.
Brokerage house profits Despite the swooning Nasdaq market in recent weeks, fresh money continues to pour into stocks and bonds, mainly through 401(k) plans of baby boomers. So whether the market climbs or dives, Wall Street wins.
Defense Financial firms represent solid value buys for investors looking for "safe havens" in case of market meltdowns.
Bottom line: Earnings of financial firms may moderate in the months ahead, along with the economy. But barring the unexpected, they should remain among the better buys in the market, experts say.
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