Bank Investment Funds Lure Most Money, Post Steepest Declines

By Elizabeth Stanton

Aug. 14 (Bloomberg) -- Funds that invest in banks and brokerages are luring the most money this year even as the shares they buy post their biggest declines in almost five decades because of mounting credit-market losses.

Exchange-traded funds linked to baskets of financial shares raised $8.67 billion during the first seven months of the year, the most of 94 investment categories tracked by research and investment firm Birinyi Associates Inc. More than $500 billion of subprime-related losses pushed banks in the Standard & Poor's 500 Index down 54 percent from their 2007 record, the biggest drop since at least 1962, Birinyi data show.

Investors were rewarded in the last month after the government agreed on a plan to rescue Fannie Mae and Freddie Mac, the biggest U.S. mortgage-finance companies, while curbs on short selling spurred a rebound in banks. The Financial Select Sector SPDR Fund has surged 20 percent since sinking a month ago to the lowest level since its 1998 creation.

``It goes completely counter to what you read, that everybody is selling, everybody is bearish, everybody is shorting financial stocks,'' said Birinyi's Robert Leiphart, who helps manage $350 million in Westport, Connecticut. ``When people say, `It's the worst it's ever been,' it's usually the bottom and the time to start to buy.''

In a short sale, investors borrow securities and sell them on the expectation they can be purchased at a lower price later and returned to the holder.

Most Assets

Financial companies grew to the biggest of 10 industries in terms of ETF assets, with a combined $21.3 billion, Birinyi data show. Funds owning energy producers, the second-biggest category and the best-performing stocks for most of 2008, had outflows. ETFs track stocks, bonds, commodities and currencies.

State Street Corp.'s $7.33 billion Financial Select Sector SPDR Fund extended its year-to-date retreat to 41 percent on July 15, when it closed at $17.17 in American Stock Exchange composite trading. The so-called XLF peaked at $38.02 in June 2007.

The XLF reflects the value of the 88 banks, brokerages and insurers in the S&P 500, giving investors a stake in the group through a single investment.

Financial shares in the S&P 500 are this year's worst performers just as they were in 2007. Since last March, the world's biggest banks and brokerages have been forced to raise more than $350 billion to replenish capital, diluting existing shareholders, according to data compiled by Bloomberg.

Cheapest Since 1995

Investors in the ETFs are wagering the shares are inexpensive after the retreat left S&P 500 financial companies with a price-to-book value ratio as low as 0.97, the cheapest since at least January 1995, and a dividend yield exceeding 5 percent for the first time in that span, Bloomberg data show.

Some investors are putting money into bank funds to hedge short positions on financial stocks, not to bet on a rally, said Dodd Kittsley, San Francisco-based senior investment strategist at Barclays Global Investors, which manages 163 ETFs that trade in the U.S.

Short interest in financial companies rose in June to 4.6 percent of shares outstanding, the highest on record, Deutsche Bank AG data show. Traders pared bets against banks and brokerages and investors pulled money from ETFs in July as the stocks advanced, data compiled by Birinyi and Bloomberg show.

David Dreman, founder of Dreman Value Management LLC in Jersey City, New Jersey, said investors showed courage by pouring more money into bank funds as financial shares plummeted. His firm oversees $15 billion and had almost 29 percent of the assets of its large-company funds in financial shares as of March 31, its most recent public disclosure.

``The average investor is buying into ETFs and financial sector funds'' even as owners of financial stocks ``seem to be panicking,'' Dreman said. ``Normally investors shy away from groups that are getting clobbered.''

To contact the reporter on this story: Elizabeth Stanton in New York at stanton@bloomberg.net.