November 23, 2009
Jeff W. Arricale, portfolio manager of the Financial Services Fund and lead analyst in the financial sector discusses how company fundamentals and risk management may be the keys to effective investing in this sector.
Arricale is no stranger to investing challenges. He started managing the T. Rowe Price Financial Services Fund in March of 2007—at just the moment when the financial industry’s long run of outstanding investment gains came to an end—and then had to hold on as the industry underwent one of the most severe crises in U.S. economic history.
“For two years straight the sector went down—it was like drinking from a fire hose,” recalls Arricale. Then came a lightning-fast recovery. The strategy Arricale and his team used in that tumultuous stretch involved focusing on companies with provable business success and taking a highly disciplined approach to risk.
Financial companies suffered during the crisis by chasing hot trends that were profitable in the short term but were ultimately destructive. In Arricale’s view, a better approach for the long term is to focus deeply on company fundamentals and look for multiple ways to manage the risks inherent to investing in a single sector. “Paying attention to balance sheets on a name-by-name basis is the best risk management,” he explains.
To gain a better perspective on the financials sector, watch the video.
Given recent events, investors could be forgiven for feeling a little uncertain over the future direction of the financial sector. But Arricale’s research-driven strategy has identified many compelling opportunities in the sector. He’s specially drawn to regional banks—their revenue and balance sheet positions have improved substantially, and their risk of loan losses is diminishing as the economy recovers.
Among the largest financial companies, he is keenly focused on the survivors of the recent industry shake out. He has pushed J.P. Morgan into the top slot in his portfolio because it boasts a very strong balance sheet and excellent earnings potential. Those characteristics give the company a distinct advantage at a time when many potential competitors are struggling.
For further insight into our JP Morgan holdings, as well as investment opportunities for the future, watch the video.
Research and discipline characterize the Financial Services Fund, but on their own they may not be enough to navigate serious market challenges. Arricale is a product of T. Rowe Price’s research-oriented culture, and he argues that a sound portfolio decision-making process benefits from dynamic debate and constant communication.
After more than two years of tumult and volatility, the financial sector may not have many fans among investors. But the sector remains crucial to the overall economy, and companies that have sidestepped the problems of yesterday have a unique opportunity to be the leaders of tomorrow. By thinking not just about quarterly profits but also about long-term measures of growth and balance sheet health, he gives investors in the Financial Services Fund a chance to profit from tomorrow’s financial innovations.
The information presented was current as of October 29, 2009. The managers' views and the funds' portfolios may have changed since that time. This material should not be deemed the recommendation to buy or sell shares of any of the securities discussed.
Stocks and sectors may not perform in line with the manager's expectations. All funds are subject to market risk, including possible loss of principle. The value approach carries the risk that the market will not recognize a security's intrinsic value for a long time, or that a stock judged to be undervalued may actually be appropriately priced. Fixed-income investing is subject to currency risk and interest rate risk. High yield bonds carry a greater default risk than high quality bonds. Investing in foreign securities entails additional risks, including currency risk and political risk.
JP Morgan represented 5.2% of the Financial Services Fund as of 9/30/09.
Multiple or Price/Earnings Ratio (P/E) - The price of a stock divided by its earnings per share. This ratio gives investors an idea of how much they are paying for a company's future earnings power.
S&P 500 Index - Tracks the stocks of 500 U.S. companies.
Feedback