Bottom Fishing Financials - Not A Novel Idea

February 11, 2008

MAXfunds is all about avoiding overheated fund categories and sniffing around for out of favor fund categories. Our category rating system looks at fund flows and past performance across all funds in a category to find attractive areas. Funds that invest in financial stocks appear to be attractive as the mortgage meltdown has led to tens of billions in losses and big stock price declines for banks and other financial companies and the funds investing heavily in these stocks. Unfortunately for true contrarians, everybody else is looking to make the same bet:

Investors put $2.8 billion last month [January] into U.S. mutual funds that concentrate investments in financial-services companies, the most since Emerging Portfolio Fund Research started compiling the data in 2004....The net new deposits pushed up assets in financial-services mutual and exchange-traded funds by 20 percent to $17 billion in January...The collapse of the sub-prime mortgage market has led to more than $145 billion of investment losses and write downs for the world's biggest financial institutions since June. The S&P Financials Index fell 21 percent in 2007. Investors pulled $260 million from financial funds during the last four months of last year."

This means more money has been going into financial sector funds trying to catch the supposedly big buying opportunity than left during the financials crash last year.

We've seen this phenomenon with the Select Sector SPDRs Exchange Traded Funds. You'd think the Financial Select Sector SPDR ETF (XLF) would be hemorrhaging cash with its stakes in many troubled financial stocks. However, today this sector ETF has more money in it ($5.5 billion) than any of the other nine sector SPDRs - even the popular and hot-performing Energy Select Sector SPDR ETF (XLE). At the end of January (during peak bottom fishing optimism in financials) the ETF had $6.7 billion in assets - way up from the roughly $5 billion at the end of December.

We're going to need to see some of this money leave the sector before we see a true buying opportunity. It's not a true buying opportunity until only a few people want to buy.