Three factors were believed to be a dominating theme in the last quarter results (Q4) - the price of oil, the strong dollar and global economic growth. This time too, these three factors will be dominating the mood, with the effects largely been of the bearish tone. The stronger U.S. dollar may negatively impact multinationals' earnings results while overall weakness in oil prices will weigh on energy shares. Earnings estimates have come down significantly over the last few months. The negative revisions trend has been prominent in Q1 as well.
Focusing on the finance sector, this is a busy week for them. Banking behemoths including JPMorgan Chase, Wells Fargo, Bank of America, US Bancorp, Citigroup, Goldman Sachs and American Express are slated to report this week. As against the dismal start to the Q4 wherein Citigroup and JPMorgan being the early drags, things are looking better for the financial behemoths. Currently, the Earnings ESP for JPMorgan is positive, while none of the others mentioned here have negative ESP. Goldman Sachs meanwhile boasts ESP of 3.16.
Mutual fund investors in the finance sector thus should be busy tracking the results of financial companies. The broader finance sector should be a big growth contributor in Q1, with total earnings for the sector expected to be up 9.2% year over year. This also compares favorably with flat growth for the sector in the prior quarter.
Positive results from the financial companies would obviously help the finance mutual funds. Encouraging results will boost share prices, translating into gains for fund investors as well. In fact, their performance provides a comprehensive picture of the overall economy too.
Apart from the earnings, the finance sector also has some other great fundamentals to emerge as a potential investment destination. Before we pick the best-rated finance mutual funds, let's look into some details.
The Q1 Earnings Scenario
Banks continued with their cost-containment programs (through streamlining of operations and slashing jobs) to remain profitable. The spending of funds reserved to cover problem loans also managed to counter the tough industry backdrop. Measures undertaken to strengthen the balance sheet and improve overall efficiency dominated. Additionally, elevated M&A and IPO activities should lead to growth in the investment banking business.
Earnings in the coming quarter are projected to drop 3.8% from year-ago period, while revenues may decline 3.5%. However, the finance sector is predicted to stand out with 9.2% expected growth in earnings though revenues may fall 5.2%. Nonetheless, margins expectations are encouraging. Margins may clock 2.15% as against Q4's reported negative 0.28%.
The likely interest rates hike, though at a slower pace, will ease some pressure on net interest margin (NIM), banks' key source of earnings. Small community banks, in particular, will be the beneficiaries of the expected rate hike later this year, as the majority of their profits is dependent on lending.
However, the Q1 growth is largely aided by easy comparisons for Bank of America, which had a number of big charges in the year-earlier period. Excluding Bank of America, the sector's growth picture is a lot less impressive.
Looking at fundamentals, cost containment and balance sheet recovery hold the key to the banks' success. While cost containment can be perceived as a defensive measure, balance sheet recovery should help banks prosper.
Improvements in GDP, employment and other economic indicators have been boosting the balance sheets of banks. But the likely change in the interest rate environment later this year will result in unrealized losses on underlying securities.
However, banks are trying to reorganize risk management practices to address potential solvency issues from rising interest rates. Asset-quality troubles are also being addressed by divesting segments containing nonperforming assets. Yet we don't expect balance-sheet strength to return to the pre-recession peak anytime soon.
3 Bank Mutual Funds to Buy Now
Investing in bank mutual funds may be a prudent move given that they reduce risk to a significant extent because they offer the benefits of diversification.
We will suggest 3 mutual funds from the Finance sector . Each has earned a Zacks Mutual Fund Rank #1 (Strong Buy) or Zacks Mutual Fund Rank #2 (Buy) as we expect these mutual funds to outperform their peers in the future.
Also, they carry low expense ratio and have provided decent returns. They also hold key financial companies. The minimum initial investment for these funds is within $5000.
Fidelity Select Banking Portfolio (FSRBX) seeks growth of capital. It invests a large share of its assets in mostly banking companies, both domestic and non-US.
FSRBX currently carries a Zacks Mutual Fund Rank #1 (Strong Buy) . It has returned 3.1% and 16% over the last 1 and 3-year periods. The annual expense ratio is 0.8% as compared to category average of 1.62%. Top holdings include Wells Fargo, U.S. Bancorp, Bank of America, JPMorgan and Citigroup.
JHancock Regional Bank A (FRBAX) invests largely in regional banks and lending companies. These include commercial and industrial banks, savings and loans associations and bank holding companies. It may also invest in domestic and non-US financial services firms. Also, a maximum of 5% of the assets may be invested in companies not belonging to the financial services sector.
FRBAX currently carries a Zacks Mutual Fund Rank #2 (Buy) . It has returned 5.5% and 16.8% over the last 1 and 3-year periods. The annual expense ratio is 1.28% as compared to category average of 1.62%. Top holdings include JPMorgan, PNC Financial, U.S. Bancorp, Wells Fargo and Bank of America.
Emerald Banking and Finance Investor (FFBFX) invests a lion's share of its assets in companies primarily involved in the banking or financial services industries. The fund focuses on small to mid cap firms having market capitalization less than $1.5 billion.
FFBFX currently carries a Zacks Mutual Fund Rank #1 (Strong Buy) . It has returned 5.9% and 20.5% over the last 1 and 3-year periods. The annual expense ratio is 1.69%, which however is somewhat higher than the category average of 1.62%. Top holdings include California Republic Bancorp, SVB Financial Group and Eagle Bancorp.
About Zacks Mutual Fund Rank
By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward. Pick the best mutual funds with the Zacks Rank.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.