Ellison: Buy Simple Banks

Ryan Leggio: Could you explain a little bit about how you're valuing things right now? I know the drill is a little bit different obviously in 2008 when you're worried about, is this institution viable? Is it even going to be around in 12 months? But now that we know that there is that light at the end of the tunnel, how are you valuing banks and is it really different for small and large financial institutions?

David Ellison: Well, I think, it's similar now because everybody has the same problem. Everybody has credit and we're throwing in a little regulatory reform; we're throwing a little accounting reform; rates have been very tame, so that's been sort of the easy thing to have. I think the larger banks are struggling just like the smaller banks, but, you know the larger banks are more complicated. They have more types of loans; they've got a lot more securitization stuff; they've got European exposure; they've got Asian exposure. They've got much more commercial exposure than the small banks do and obviously people are worried about that.

Smaller banks are a lot simpler. You can look at a region and say; look, it's an easier company to look at, it's easier to analyze. So really to me, it's really, I tend to gravitate towards simplicity in this industry. We saw what complexity did to Lehman and what it did to Bear Stearns and what it did to Washington Mutual. And I think the market is realizing now that a simple banking model is what works over the long term and I think that's what -- I've always believed that, since I learned that along the way, I've been up and down this industry a long time and so simplicity always wins out and right now the goal is to buy simplicity but there's a lot of more simple models in the small area. So it's an easier fund to run. The big one you're dealing with just a lot more moving parts. It makes it harder.

Leggio: So, for an ordinary investor, looking either for diversification or they followed you maybe for years before at Fidelity and now at FBR and you're saying once again that there are opportunities in the sector. Would investors be better off in the simpler, smaller banks, easier to understand, local communities, than maybe the large banks if they had to choose one fund?

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Ellison: I think if you are worried about not losing money which I always worry about and as I manage the portfolio; I think the smaller banks, they are in better shape to manage through the cycle because they understand their loans. They have a better understanding of what markets they are in and they are not going to be as impacted by what may happen with dollar or with currencies or with sovereign debt of another nation and so I think it's a much easier thing to understand and I think it will be a less volatile place to be as we recover over the next three to five years.

Leggio: Are there any particular names that really stand out to you right now as really attractive on a long term risk reward profile?

Ellison: Well, there's a lot of them. That's the nice thing about the industry, that you have a large sample size. I look at probably six or 700 banks every quarter, sometimes more, sometimes less, depending on what's going on. There are about 800 banks that you could buy on any one day that have enough trading volume. So, there is a large sample size, so the one I'm going to, the one I would pick right now would not do as well as the other ones and sort of the classical. So I tend to take that group hug approach. I've got 75 names in the small cap fund. That's a little high, historically, because what I'm trying to do is position the funds so that it covers the whole mosaic of what's happening.

I've got some very, very strong companies and very, very weak companies, that are hopefully going to get better. You put it all to a pool and you're trying to create some regional exposure. So, that's sort of what, I hate to pick that one because this is not the part of the cycle you want to do that, because everybody is working to get better and there are just so many opportunities, because everyone is working for us, in a sense they are working for the shareholders as opposed to their bonus, when you say, in a sense doing a couple of years ago

Leggio: So, if investors are looking to buy individual names, maybe buy a collection of individual names that all look maybe the same on a valuation basis.

Ellison: Right, absolutely because I think that the industry is going to recover, because they are making -- again, this is probably when you talk to the little guys, they'll tell you that this is probably the beset time in 30 or 40 years to be making loans because they are getting the terms that they want. They're not being competed on by people who are just trying to make a lot of loans. So the volume's gone but they are making very, very good loans, the deposit flows are very positive, in a sense what people are, in a sense moving away form the stock market a little bit. They're moving away from the money market funds that are yielding very, very low meaning five, ten basis points and the banks are offering 100 basis points. So they've got plenty of liquidity and so eventually those bad loans are going to be written off and those good loans are going to be on the balance sheet. So the question now is just giving that time and of course my job is to try to give the investors a chance to play this recovery that's going happen.