The writing on the wall is clear. Recent economic data clearly
shows that the tapering of the Fed's economic stimulus program will
begin soon. Key reports on unemployment and the service sector have
firmed up the central bank's basis to begin tapering the program by
this month itself.
Encouraging economic data
The ISM Services Index is now at 58.6, increasing from the level of
56 it achieved in July. This is clearly higher than most
expectations, which were around the 55 mark. More significantly,
the index is at its highest level since December 2005. The
service sector accounts for around 85% of the economy, and, as
such, this is an extremely significant development.
Additionally, jobless claims numbers fell last week, by 9,000 to
323,000. This is the lowest level in almost five years. Despite
other data on this front, the report points to a gradual
improvement in the employment situation. Reductions in government
spending and healthcare reform seem to have had little effect on
the job market.
Resurgent Regional Banks
The consequence of such data and subsequent tapering of the Fed's
stimulus package has pushed up interest rates. The yield on
benchmark 10 year U.S. Treasury bonds are close to the key level of
3%. Regional banks are some of the major beneficiaries of this
development and many have outperformed larger players.
This is because many regional players such as
(ZION), have a higher percentage of variable rate loans. As
interest rates increase, this pushes up net interest margins. This
is the difference between what banks have to pay depositors and the
amount received from loans. Two key regional banks,
The PNC Financial Services Group, Inc.
(PNC) have recently reported higher earnings.
An Impetus for Insurers
Insurers had a tough time due to the low interest rate regime. This
is because most insurance companies invest in bonds with longer
maturity periods. With interest rates at all-time lows, they
continued to lose money, since they had to hold onto such
However, rising interest rates mean they could become excellent
investments themselves. This provides them with an opportunity to
take on a higher level of risk. Many of them could now pick up
equity investments and bonds with shorter maturity periods. This
could have an extremely positive impact on their yield curves.
Undoubtedly, the insurance sector seems to be one of the major
gainers of rising interest rates.
Mutual Fund Picks
Fidelity Select Insurance
(FSPCX). Launched in December 1985, this is the oldest of our
choices with net assets of $530.5 million. It has a minimum initial
investment requirement of $2,500. The fund invests in companies
whose principal operations are related to the insurance sector. It
focusses on acquiring common stock, issued by both domestic and
The mutual fund holds 43 securities in all. It is heavily
concentrated around its top 10 holdings, which make up 58.25% of
its assets. Its top 3 holdings are
Berkshire Hathaway Inc.
American International Group, Inc.
(ACE). The fund returned 41.33% over the last one year period and
has a Zacks Rank #1(Strong Buy).
John Hancock Financial Industries A
(FIDAX). With net assets amounting to $518.12 million, this
fund was founded in March 1996. This fund focussing on investing in
domestic and foreign financial service companies regardless of
their size. A maximum of 15% of its assets may be invested in short
term securities rated investment grade.
This fund is more widely diversified and holds a total of 77
securities. Its top 10 holdings account for 29.22% of its assets.
Its two top holdings are US Bancorp, followed closely by
Ameriprise Financial, Inc.
(AMP). Zions Bancorp is also among of its top 10 holdings. The fund
returned 41.58% over the last one year period and has a Zacks Rank
Fidelity Select Banking
(FSRBX). Another fund from the Fidelity stable, this is also
the largest of our choices. Net assets of the funds amount to
$592.51million. The fund concentrates on investments in the banking
sectors. It primarily purchases common stock and utilises
fundamental analysis to determine its investments, both domestic
The fund has a total number of 55 assets. The asset it is most
heavily invested in is U.S. Bancorp, which makes up 12.68% of its
assets. It invests 4.95% of its assets in PNC Financial, its third
highest holding. The fund returned 31.31% over the last one year
period and has a Zacks Rank #1(Strong Buy).
With tapering more or less set to kick in by this month, a higher
interest rate environment is inevitable. Since they invest in
insurance and regional banks, these mutual funds are good choices
for your portfolio.
View All Zacks #1 Ranked Mutual Funds
ACE LIMITED (ACE): Free Stock Analysis Report
AMER INTL GRP (AIG): Free Stock Analysis Report
Get Your Free (FIDAX): Fund Analysis Report
Get Your Free (FSPCX): Fund Analysis Report
Get Your Free (FSRBX): Fund Analysis Report
PNC FINL SVC CP (PNC): Free Stock Analysis
US BANCORP (USB): Free Stock Analysis Report
ZIONS BANCORP (ZION): Free Stock Analysis
To read this article on Zacks.com click here.