FBR Funds Chief Investment Officer David Ellison, who avoided much of the financial sector meltdown, has been buying up bank shares lately — and a big reason, he says, involves the lessons he learned while working under the great Peter Lynch earlier in his career.
According to Reuters, Ellison had just 10% of the FBR Large-Cap Financial fund’s assets in cash in early 2007, but raised that to 30% by the fall of ’07 and 50% by Jan. 31 of this year. Then, with the fund 60% in cash this February, Ellison started buying up bank stocks. “I bought them on the way down, I didn’t pick the bottom,” he said. “I really started to get more aggressive as I started to see home price activity pick up in some of these markets where you had an 80 percent increase in home sales.”
Ellison says the values in the banking industry were the lowest they’d been since the early 1990s, another time of crisis. “I just remember the echo of Peter saying, ‘Well look, if all these are at 10 percent of book and if the market is right that all these stocks are going to fail, it doesn’t matter, you might as well just buy ’em because if they all go to zero, you’re not going to have a job anyway,'” Ellison told Reuters.
Ellison’s moves have paid off. His financial fund is up almost 10% in 2009, while the Financial Select Sector SPDR ETF is still down close to 10%. Since the start of 2008, the fund has sustained about a third of the losses of the broader financial index.
Ellison says the worst of the financial crisis is over. Between the government’s support and the banks’ efforts to clean up their balance sheets, he thinks that in less than seven years — which Reuters says is the average life of a bank’s loan portfolio — banks will be in a good position. “I want to own them now, and I want to sell them in seven years when it’s all cleaned out,” Ellison said. “You go from ugly to OK to good to great and the last time they were ugly was 1990-1991, and from ’91 to ’95 was the best time to buy bank stocks in my career.” Ellison also says that besides Citigroup, the leadership in top U.S. banks is much better than it was in 1990.
In regard to specific banks, Ellison said safe bets include JPMorgan Chase, Wells Fargo & Co. and PNC Financial Services Group. A few others — SunTrust Banks, KeyCorp, Fifth Third Bancorp, and Comerica — need to raise capital but are also good values, he says.
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