Beset with plummeting bank stock values and asset outflows, some financial funds lost more than 60% of their assets last year.
But not all is gloomy. Some investors say prospects are looking better. "On an investing basis, this is the time to put your money in the highest-quality performers," said Mark Davis, director of research at Banc Stock Group in Columbus, Ohio.
But last year, some of the biggest financial services funds suffered major asset losses, according to data provided by Morningstar Inc. of Chicago. Three financial funds by John Hancock Advisers lost a combined $1.7 billion.
Though only a few funds did worse than the 15% drop of the Standard and Poor's index of 31 banks, they included some of the biggest financial funds: Pilgrim Bank and Thrift B and Rydex Banking funds lost 19%, FBR Financial Services lost 17%, and Hancock's Regional Bank fund lost 16%.
Though many funds made modest gains, only a dozen or so topped 10%, in a year when the Nasdaq increased 86% and the Dow Jones industrial average, 25%.
There is some hope for 2000, though. Some observers say the market is ripe for a turnaround, with solid earnings expected from most companies for the fourth quarter.
"Right now the story isn't bad or negative for banks and financials," said Scott Edgar, director of research for the $1.1 billion asset Sife Trust Fund of Walnut Creek, Calif. "But there are other things, such as technology, that are a lot more interesting to investors."
But some investors still question why anyone should invest in banks or financial stocks when the pickings look much better elsewhere.
It was "better to own a widely diversified fund over the last year and a half, absolutely," said Miles Seifert, chief investment officer at Gray, Seifert & Co., a New York subsidiary of Legg Mason Inc. "But you don't buy a fund for tomorrow. You buy it for the future."
Though technology funds are hot these days, so were financial funds just a few years back. In 1997, for example, Hancock's Regional Bank fund had a 54% return, Pilgrim Bank and Thrift A, 64%, and FBR Financial Services, 48%.
The survey included funds from the Morningstar data base that had more than 80% of their assets in financial stocks. Of the 43 funds selected, 23 reported declines in returns in 1999, and 20 had gains.
Some fund mangers say the worst is over, because interest rates seem to be stabilizing.
"We are going to move into the market more aggressively," Mr. Davis said. "We are probably going to be in a significant bull market for the rest of the quarter. It is time to buy, folks."
Last year bank stocks began falling in May when inflationary fears were beginning to take hold as the result of a report from the U.S. Commerce Department that showed a rise in consumer prices. Mr. Davis' Banc Stock Group in June reduced its holdings of banks to a conservative position of 30% cash. That helped the company's funds avoid big losses when bank stocks suffered badly in July and August. The Banc Stock Group's A fund had a 1.7% loss for 1999.
"We are saying our hosannahs and hallelujahs," Mr. Davis said.
Now, with a more bullish outlook on interest rates and an improving global economy, Mr. Davis said financial funds have a "backdrop to start selecting the best performers in the group.
"We are not going to see every stock perform well," he said. "Too many people have been disappointed. The best banks are going to outperform the weaker ones substantially."
Mr. Davis' is bullish on Citigroup Inc., Wells Fargo & Co., Chase Manhattan Corp., FleetBoston Financial Corp., and Firstar Corp.
The best-performing financial services funds in 1999 tended to have broad investment guidelines, without being hampered by focusing entirely on banks and thrifts. For example, AIM Global Financial Services Fund A generated returns in the 24% range. Its largest holdings in the second quarter last year included Knight/Trimark, Citigroup, Providian Financial, Freddie Mac, and Telebanc Financial - which was bought by E-Trade Group Inc.
Some of the other big gainers for 1999 included Morgan Stanley Dean Witter & Co.'s series of Financial Services funds, which generated returns of 13% and 14%, the Titan Financial Services fund, at 18%, and the Federated Global Financial Services funds, with returns of 10% and 11%.
Also helping buoy the expectations of financial fund managers are the hopes that new merger activity will lead to better valuations.