Fund Analysis – Financials Sector

Alliance Advisors’ Investor Intelligence Group analyzed its mutual fund universe with a particular focus on those funds that have investments in the Financials sector as their largest allocation. What we found was that each of the 10 largest funds by AuM experienced capital inflows (attraction of investor dollars) ranging from a high of ~$625 million to a low of $26,000. The average capital inflows for the most recent 1-month period was $285 million. Further to the health of these funds, we analyzed the funds’ year-to-date (YTD) capital flows. All experienced YTD capital inflows except for the MFS International Equity Fund, which suffered outflows of $41 million.

Of the analyzed group, 50% of the funds are Value funds, while 40% of the funds were primarily focused on Large Cap stock, and another 40% focused on the Total Market basket of stocks. Only one fund had a smaller focus towards Mid Cap stocks. The Large Cap focused funds experienced the most bullish capital inflows, combining for over $1.4 billion of inflows over the past month (an average of $368 million per fund). The Mid Cap focused fund underperformed the rest of the group, attracting just $125 million over the same period.

Such strong capital flow trends suggest that their focus on the Financials sector is benefiting their performance which in turn is attracting more investors. To garner more insights, we turned to these funds directly to learn what positively impacted their investment strategy success, and more importantly what their outlooks were for the near term. The following are excerpts from published fund commentaries…

Putnam Large Cap Value Fund

Portfolio managers Lauren DeMore and Darren Jaroch commented, “While security selection had a positive impact on performance, sector allocation decisions detracted. The portfolio’s small cash balance benefited relative performance, given the challenging environment for the benchmark. From an individual stock perspective, top contributors were overweight positions in financials companies, including Apollo Asset Management, Capital One Financial, and Citigroup.”

As for their outlook, they believe “ongoing but moderating economic growth will be supportive of earnings growth, and hopefully this will be enough to offset a multiple contraction. Value stocks should benefit in the event of a broadening of the market. They also offer more supportive valuations in an environment of potential surprises.”

Fidelity Series Value Discovery Fund

Portfolio Manager Sean Gavin detailed, “Large-cap value stocks struggled the past three months, primarily reflecting a weak December, as investors focused on growth stocks and an investment backdrop that featured a sturdy U.S. economy, pro-growth policy hopes following the November elections, and the potential for artificial intelligence to drive transformative change. Overall, the U.S. economy remained sturdy as investors began to anticipate possible policy changes after the November elections and the potential for artificial intelligence to drive transformative change continued apace. The shift toward global monetary easing also gained steam.”

With respect to individual contributors, Gavin elaborated, “stock selection combined with an overweight in the financial sector added value. Overweights in several bank stocks – Wells Fargo (+25%), JPMorgan Chase (+14%) and Bank of America (+11%) – further contributed. Banks were beneficiaries of improved investor sentiment in Q4, reflecting the market’s perception that banks and other financial firms will enjoy a favorable environment under the income U.S. administration.”

Fidelity Value Fund

Lead Portfolio Manager Matt Friedman says “the fund was positioned in the stocks of companies with a historically lower price-to-earnings ratio and higher free-cash-flow yield than the benchmark. Stock selection and industry positioning each dragged on the fund’s performance versus the benchmark this period. Choices in consumer discretionary, industrials and financials hurt, as did stock picks and an overweight in the lagging energy sector.”

Matt says the managers have become “a bit more cautious than usual, given current market valuations.” They have exited several stock positions due to lower free-cash-flow yields than they like to see, while they believe many stocks with a higher FCF yield appear risky. Still, Matt says he is “finding value in the energy and materials sectors, two areas of the market that have not appreciated as much as others in the recent cyclical stock rally.”

Eaton Vance Atlanta Capital SMID-Cap Fund

The fund management team of Jeffrey Wilson, Matthew Hereford and Charles Reed commented, “Stock selection was most positive in consumer discretionary and materials during the quarter. At the industry level, good stock selection in IT services and in chemicals was notable. From an allocation standpoint, the largest contributions to the Fund’s relative performance came from an underweight to health care and an overweight to financials.”

As for investment outlook and fund positioning, they elaborated, “With current stock valuations being fair to full, it is likely that forward market returns are going to be largely driven by earnings. Potential drivers for positive earnings growth could come from lower interest rates, continued reshoring activity in the U.S., a reduced regulatory and tax environment, and the continuation of an economic ‘soft landing.’ Potential negatives to earnings growth and stock valuations likely center on
lingering inflationary pressures and higher-than-expected interest rates. With so much uncertainty, we continue to focus the portfolio on high quality companies that should protect in volatile periods and perform well in rising markets.”

The theme from those funds we analyzed is that there is no theme. For some funds, their overweight exposure to the Financial sector was a contributor to their performance, while for others, alpha was generated from different industry investments.