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Financial Funds Are Red-Hot

Plus, Schwab receives Wells Notice, Fidelity Magellan adds gold, and more.

Morningstar Analysts, 10/19/2009

Investors fled the financials sector last year on fears of the global financial system's collapse. That, of course, didn't happen, and the sector has recovered strongly in 2009. The specialty financials category is up 31.1% this year following a 43.9% loss for the typical financials fund last year. For the year to date, Goldman Sachs GS and Morgan Stanley MS are both up more than 100%, and J.P. Morgan Chase JPM is up 51.3% (although some firms like Citigroup C continue to struggle).

Davis Financial RPFGX is beating 86% of its peers this year and is up 106.3% since the start of the market rally on March 9. Manager Ken Feinberg employs a buy-and-hold strategy in this concentrated fund, which can test investors' patience if a stock takes awhile to gain and can lead to short-term volatility if a few picks go south. Feinberg's strategy is paying off this year. The top holding, at 10.6% of the portfolio, is reinsurer Transatlantic Holdings TRH. Not widely owned by the fund's category rivals, it's up 32.4% this year. The fund also has an 8% position in American Express AXP, which has almost doubled. Another top holding, State Bank of India, is up 61.1%.

The prudent, diversified approach of manager Jeff Arricale helped Analyst Pick T. Rowe Price Financial Services PRSIX outpace 75% of its peers last year but also hasn't constrained it in 2009, as the fund is beating two thirds of its peers. Since the rally's March 9 start, it's up 104.9%. The fund's top 10 positions include firms such as J.P. Morgan, Goldman Sachs, and Morgan Stanley, but it also holds real estate investment trusts and insurers like Aon Corp. AOC. He'll also venture outside financials. His biggest position outside the sector is top-15 holding Cigna CI. The managed-care provider is up 76.5% for the year to date.

Even the worst performers in the category since March 9 are still doing well in absolute terms. Legg Mason Barrett Financial Services SBFAX is up 46.2% since the rally's start, but that's dwarfed by the category's 109.9% gain for that period. However, it lost less than 90% of its peers last year. The fund's biggest equity position is financial software firm S1 Corporation, which is up 20.8% since March 9 but down about that much for the year overall. The fund skips giant banks like Goldman Sachs and J.P. Morgan and instead owns a good chunk of smaller-cap names. The portfolio is dotted with a number of regional banks that have struggled this year. It has also been held back by its 10% cash stake.

Schwab Receives Wells Notice
In an Oct. 14 filing, Charles Schwab announced it had received a Wells notice from the SEC. The notice alerted Schwab to potential civil enforcement action against its Schwab YieldPlus SWYSX and Schwab Total Bond Market SWLBX funds because of possible securities law violations. A Wells notice gives companies a chance to respond to the SEC before the agency decides how to proceed.

YieldPlus lost 35.4% in 2008. Its prospectus had said that it would experience "minimal changes in price."

Magellan Continues Loading Up on Gold
Harry Lange, the veteran manager at the $24.8 billion Fidelity Magellan FMAGX, has been buying gold since the beginning of 2009 and has increased his stake in recent months. Currently, gold mining companies constitute about 7%-8% of the portfolio. Senior fund analyst Christopher Davis says Lange's investments in gold mining companies reflect his concerns about inflation and the health of the U.S. dollar, and the manager believes it should help reduce the fund's volatility because gold prices aren't tightly correlated with the broad market.PAGEBREAK

Hot Small-Cap Fund Closes
Aston closed Aston/TAMRO Small Cap ATASX to new investors Friday. The $847 million fund is a solid small-blend offering with a good manager in Philip Tasho. He runs a growth-at-a-reasonable-price strategy that focuses on three themes: consolidation, restructuring, and new products. The fund is up 32% for the year to date as of Oct. 14, and it boasts trailing five-year returns of an annualized 6.1%.

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