After appearing nearly moribund during the past few years, the financial sector has finally come back to life. Through the first two months of this year, the average specialty-financial fund had posted a 13 percent loss. Now, it's sitting on a 15 percent gain.
A lot of the factors that sparked this rally are still in place. Financials began to rise when it appeared likely the Federal Reserve was near the end of its series of interest-rate increases, which had punished the sector. With inflation apparently docile, some analysts are even talking about interest-rate cuts early next year.
Property-and-casualty and health insurers have pushed through sizable premium increases, which will help their bottom lines. Banks' loan quality remains good, and brokerages' business is booming.
There are plenty of diversified portfolios with sizable financial stakes, talented managers and reasonable costs. Here are a few of our favorites.
Fidelity Equity-Income II: You may not have heard of Stephen DuFour, but he's a real rising star at Fidelity. He took over this fund from Bettina Doulton in February, and while the fund has been a bit sluggish this year, DuFour's longer-term record suggests that better things lie ahead. During his 30-month stint as manager of Fidelity Balanced Fund, DuFour put up well-above-average numbers. At the end of January, 21 percent of Balanced's stocks were in financials, so DuFour has clearly turned more bullish on the area.
Weitz Value: Wally Weitz is one of the smartest managers around, and he loves financials. Indeed, the fund sports a 50 percent stake in the sector. You won't see many of the sector's behemoths here; Weitz's tastes run to fare like Washington Mutual, PMI Group, and Greenpoint Financial.
Neuberger Berman Focus: Kent Simons is another manager who isn't afraid to bet the ranch. Simons has consistently maintained a high weighting in the sector - he now has more than 50 percent of stocks there - and he clearly knows how to pick financials. Simons has built an outstanding record here, partly on the strength of picks such as Morgan Stanley Dean Witter and Citigroup.
Selected American Shares: This is another terrific fund with a sizable weighting in financials, nearly 40 percent of stocks. Co-manager Chris Davis is one smart cookie, and he's the latest in a long line of Davises who know how to tear apart a bank's balance sheet. The fund has a terrific record, and a lot of management's picks over the past few years have been spot-on, with Citigroup and Household International posting especially big gains this year.