Institutional investors found big thrifts much more appealing than big banks during the rockiest quarter of the year.

While major institutional investors were generally dumping big-bank stocks in the third quarter, they were adding shares of big thrifts-and at a slightly faster rate than in the second quarter.

The 15 institutional investors with the biggest holdings in the 25 largest thrift companies upped their collective stake by 4.25%, or $469 million, during the third quarter, according to statistics compiled by CDA/Spectrum Research Services of Rockville, Md.

In the second quarter this group raised its holdings of such thrifts by 2.06%, or $435 million.

The huge third-quarter selloff in banking stocks was spurred by troubles in foreign economies.

By the end of the quarter, the 25 institutional investors with the most stock in the 25 largest bank holding companies held shares worth 52.60% less than three months earlier, the survey said.

To be sure, thrift stock prices were also dragged down. In fact, the overall value of big-thrift stocks owned by the top 15 institutions dropped 47.74% during the period.

But savvy investors apparently saw significant value in the thrifts, notwithstanding the general ills of the market, a flattening yield curve that crimped thrifts' rate spreads, and predictions that the U.S. economy was heading for a recession.

"The stocks were banged around unfairly, and it created a buying opportunity for investors who were quick on their feet and looking for value," said Thomas O'Donnell, a thrift analyst at Salomon Smith Barney.

He noted that thrifts were punished together with banks, even though they had no problems with foreign markets, trading, or liquidity.

"The market was throwing the baby out with the bathwater, the bathtub, and all the plumbing," said Terry Maltese, president of Sandler O'Neill Asset Management, a hedge fund that invests in thrifts and banks.

Though a flattening yield curve poses problems, many institutions can earn their way through them, Mr. Maltese said.

Indeed, thrifts combatted the leveling yield curve with such adroit strategies as lowering their funding costs, which drains off excess capital, and buying back stock, which bolsters share price, said Mr. O'Donnell.

"They also sold fixed-rate loans into the secondary market, which is good for current-period earnings, and thus were becoming more like consumer banks by adding more higher-yielding loans to replace the mortgages," the analyst added.

"When investors realized that there was no serious destruction of value occurring among thrifts, and saw that the stocks were cheap, they began to buy again," Mr. Maltese said.

That was decidedly not the case with bank stocks. Institutional investors ceased adding big-bank stocks to their portfolios for the first time this year as a result of the roiling market.

In fact, the rate at which investors acquired those stocks had been slowing steadily over the last several quarters. But in a dramatic shift during the third quarter, major institutional investors-who tend to be buy- and-hold types-sold aggressively.

The top 25 institutional investors reduced their positions by 0.89%, to $1.3 billion, during the third quarter, according to CDA/Spectrum. They had upped their holdings by 1.09% in the second quarter and by 2.64% in the first.

Institutional investors whose third-quarter positions in big-bank stocks were cut by more than 40%, by sales and falling values, included Fidelity Management and Research Corp., with a portfolio decline to $14.1 billion, from $25 billion; Morgan Stanley Dean Witter, to $3.5 billion, from $6.5 billion; and Scudder Kemper Investments Inc., to $3.4 billion, from $6 billion.

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