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November 17, 2008 Financial Gearing As I’ve said in past few weeks, the financial sector remains interesting for investors with a fairly high risk tolerance, and it’s time to wait for the sector to turn around. Ironically, there are two mutual funds out there that focus on the financial sector and are outperforming the S&P 500 in a pretty impressive way. After today’s close, the S&P 500 is down more than 42 percent year-to-date, but Burnham Financial Industries, which combines the use of both long and short positions, has given up only about 14.5 percent. Burnham Financial Services, a long-only fund, is down by about 20.7 percent, but it’s still outperforming the broader indexes. We sat down with fund manager Anton Shutz in early October to find out his thoughts about the industry and discuss his decision-making process. Ben Shepherd: Given that the problems in financials are ongoing, why are your funds attractive now? Anton Shutz: With the Industries fund, the ability to short for the right reasons in this choppy market is important. We short to make money, not just to protect. We also love to use options; we love to write covered calls on our longs at targets we’re willing to sell the stocks, and we actually like to write covered puts on our shorts at targets we’re willing to cover. We’re very proud of the fact that we’re up year-to-date and that we’ve shown much less volatility than any other fund. We think we’ve built a pretty good mousetrap in this environment, not only to benefit from the volatility of stocks going up and down and being able to cover or re-short, but also from the perspective of option volatility, which has been reasonably high on a historical basis. And we’re actually able to get paid from that as well. We’re excited about the near-term future because a lot of financial services are cheap on an absolute basis, but we’re going to see some more capital rises at very attractive prices. A lot of the money that was made in the early 1990s wasn’t on the first or second round. We’re analyzing every deal that’s coming to market. But I also think we take a very different view of financial services stocks than the generally perceived view. People talk about financial services as a sector, and I look at it as a series of subsectors from different lines of business; obviously, there are insurance companies, investment banks, money managers and mortgage real estate investment trusts (REIT). And even in the depositories, there are very different business models between the money centers and the processing banks and the savings and loans. You can even delve deeper into that on the geographic side and the product mix. So you really have to have a macro view and look at the credit environment, the interest-rate environment, the shape of the interest rate curve and the health of the capital markets to make decisions about where you want to be--and not in terms of those subsectors. Then you have to decide the geography: What’s the shape of the balance sheet, what’s the opportunity set, what’s the catalyst? So, we’re always hunting for ideas, and I think this is very much a stock-picker’s environment. Click here to continue reading |
| Friday Market Wrapup is a weekly e-zine written by Ben Shepherd and published by KCI Communications, Inc. Mr. Shepherd is research editor for Personal Finance.
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Friday Market Wrapup - November 17, 2008: Financial Gearing
