Princor Emerging Growth Fund and Princor Growth Fund suffered damage this year when their investments in health care stocks fell ill.
Luckily, the portfolio manager, Michael R. Hamilton, had inoculated the funds with healthy doses of bank stocks.
"The banks have been a great anchor against this current market," said Mr. Hamilton, who is vice president of Invista Capital Management, which runs the Princor funds. "Even banks have gone through a little turbulence, but not quite as much as other sectors."
Princor Emerging Growth Fund, which has $250 million under management, invests in small capitalization stocks, of which 18.2% is in financial companies. Traditionally the fund has outpaced the S&P 500, but recently it has lagged.
Analyst Michael Mulvihill of Morningstar Inc. noted that the fund was ranked in the 16th percentile for both three-year and five-year returns, meaning that only 16% of the funds in its peer group had higher returns for those periods.
"That is a very good performance over that period in terms of returns," said Mr. Mulvihill. He noted that some bank stocks in the fund had "gone through the roof."
Indeed, Mr. Hamilton's picks have appreciated significantly since he began investing in small banks in 1988.
He credited much of the gain to a long-term strategy that emphasizes little turnover in the portfolio's makeup, strong fundamentals, and an assumption that consolidation will continue.
In fact, one of Mr. Hamilton's investment picks has gone through two acquisitions.
In 1988, Mr. Hamilton took a 1% stake in $1.2 billion-asset First Interstate of Iowa. First Interstate was acquired by Boatmen's Bancshares in 1991, and Boatmen's agreed this summer to be acquired by NationsBank Corp.
Mr. Hamilton said he now has a 244% return on the Iowa bank investment.
His emerging growth fund also hit pay dirt when he took a 1% position in Hawkeye Bancorp, a $1.9 billion-asset community banking company in Des Moines, which was acquired by Mercantile Bancorp.
That investment made a 150% return, he said.
Although most banks were suffering from poor real estate investments when he started investing in them, Mr. Hamilton said, he avoided trouble by focusing on small midwestern banks.
"We looked at geography first," said Mr. Hamilton. "Some of the major banks in the metropolitan areas were really having problems, so we invested in banks in the heartlands, where the problems in lending were less intense."
Princor Growth Fund has fewer bank stocks than the emerging growth fund but also has gained because of Mr. Hamilton's savvy picks in the bank sector. About 10.9% of its $250 million under management is in financial stocks.
Mr. Hamilton has taken positions in several regionals, including Meridian Bancorp, Reading, Pa., which recently agreed to be acquired by Philadelphia's CoreStates Financial Corp.; Banc One Corp., Columbus, Ohio; Firstar Corp., Milwaukee; and First of America Inc., Kalamazoo, Mich.
Bank stocks are relatively inexpensive, Mr. Hamilton said, and benefit from the fact that consolidation will continue.
Mr. Hamilton is also buying into savings and loans, particularly those that are becoming more bank-like.
He has stakes in First Federal Capital Corp., La Crosse, Wis., and First Financial Bank, Stevens Point, Wis., whose stock he bought two years ago. He also had positions in North Fork Bancorp., Melville, N.Y., and North Side Savings Bank, Floral Park, N.Y., which North Fork recently acquired.
"These thrifts act like banks and have good solid business services to sell into a good geography," said Mr. Hamilton.
Mr. Mulvihill at Morningstar likes Mr. Hamilton's strategy.
"The larger banks have done incredibly well," he said. "The smaller ones haven't kept up, but they tend to be so inexpensive that you can buy them at a cheap price and hope that they will be bought out by a larger company."