"Of Mutual Interest"-David Ellison of FBR Small Cap Financial Fund
Tuesday, September 01, 2009PAUL KANGAS: As we noted, it wasn't a good day for financial stocks. But in tonight's "Of Mutual Interest" segment, we'll focus on a mutual fund that's done well by investing in the stocks of smaller financial companies -- FBR Small cap financial fund. In the first eight months of this year, it is up 22 percent. Over the longer term, it's been consistently ahead of its funds in the category, returning an average of almost 11 percent a year over the past decade. David Ellison has managed FBR Small Cap Financial since its inception. And David, welcome to NIGHTLY BUSINESS REPORT.
DAVID ELLISON, PORTFOLIO MANAGER, FBR SMALL CAP FINANCIAL FUND: Hello, Paul, it's good to be back.
KANGAS: One reason your fund is doing well is that it was mostly in cash early this year when the market was crashing. Why were you smart enough to sit on the sideline?
ELLISON: Well, I guess I'm maybe not smart enough, but I went through the '87, '92, '95 cycle and I think I learned back then that once non-performers start to tick up it was time to start pulling back. So about six, seven quarters ago when the non-performers or the non-performing assets of the industry started to rise, I started to cut back my positions.
KANGAS: So now you've gone back into the market?
ELLISON: Yes, and I think what's happened is that we've seen stabilization in some of the markets. LIBOR's come down. The housing market appears to have stabilized. There's been a lot of capital raised in the industry. The Federal government is involved. And so the industry is starting to heal itself and now it's time to start to reinvest in the industry.
KANGAS: You're not fully invested yet?
ELLISON: Oh, I've got about less than 5 percent in both funds, so I've gotten back into the industry pretty heavy now. But I think this is really a three to five-year cycle that we're in now, going from fundamentally ugly to OK to good to great as the fundamentals improve over the next five to seven years.
KANGAS: Smaller financial stocks have done much better this year than larger ones, but there are new worries that this group may soon feel the impact of bad loans. Are you concerned about this?
ELLISON: Well, there will be additional bad loans. There will be bank failures as we're hearing. Some are predicting another 200 or 300. But again there's about 500 to 700 to invest in, so there's plenty of well-run banks out there that have come through this cycle that are doing the things to get better that I can invest in. Plus the consolidation of the industry forced on us by the FDIC through these bank failures will be a positive for those who survive.
KANGAS: What are some of the largest holdings in your portfolio and why do you like them?
ELLISON: Well, I like all of them generally because, again, fundamentals are improving. They've gone through a credit cycle, some names like Webster, names like Comerica, which is now sort of a bigger cap name, names like Astoria in New York, names like TCF out of Minneapolis. So I have about 80 names in the portfolio. So again, this is not a one-trick pony. I'm trying to give the investor a broad exposure to the industry recovery over the next coming years.
KANGAS: David, do you personally own any of the stocks you've just mentioned?
ELLISON: I certainly do through the funds and that's the way I've done it for a long time and plan to continue to do so.
KANGAS: So indirectly you do own them?
ELLISON: Yes, absolutely.
KANGAS: Until today we saw quite a big run-up in the financial sector with the S&P financials up more than 130 percent since March. Do you think that rally is over or is this just a temporary pause?
ELLISON: People always argue the stocks are ahead of the fundamentals, the fundamentals are ahead of the stocks. What I'm focusing on is that we have an environment now where the fundamentals are going to be getting better over the next three to five years and you want to on balance be in the group. And so today is one day out of the many and it really doesn't matter. The question is do you want to be here over the next three to five years?
KANGAS: OK. Very good, I appreciate your comments and sharing your views on the financial segment of the market. I want to thank you for being with us once again.
ELLISON: You're welcome, Paul.
KANGAS: My guest, David Ellison of the FBR Small Cap Financial fund.
