It is too late in the current business cycle to buy bank stocks, according to the U.S. portfolio manager for a Swiss private bank.

Financial Mix

Vontoble's financial stock holdings, as a percent of total portfolio, at Nov. 1Bank: 14.70% BankAmerica 2.40 Shawmut 2.50 Bank of Boston 2.80 Chemical Bank 2.10 First Union 2.00 California Center Bank 0.80 Hanmi Bank 0.60 Comerica 1.50Nonbank 38.90%Insurance 21.30% Argonaut Insurance 0.90 Ace Limited 1.20NWNL Cos. 1.50 AIG 2.10 Providian 1.90 Chubb 2.40 Old Republic 2.40 Orion Capital 2.10 Torchmark 2.70 Unum 1.60 Lincoln National 2.50Savings and Loan 1.90% Golden West 1.90Other 17.60% American Express 1.90 Fannie Mae 9.80 Freddie Mac 5.90

"I am not a bear on the banks, but I have to respect the risks," Edwin D. Walczak, chief investment officer of Vontobel USA Inc. said this week in an interview.

"They look cheap right now, and they actually are cheap," he said. "The problem is that no one, not even the Federal Reserve, knows which inning we're playing in when in comes to interest rates."

Vontobel USA is the domestic affiliate of Bank J. Vontobel & Co., Zurich, a major Swiss private bank.

It manages the portfolio of the U.S. Value Fund, a mutual fund whose aim is long-term capital appreciation.

Mr. Walczak does own bank stocks.

In fact, with 15% of his $25 million portfolio in banks, he views himself as "slightly overweighted" in the sector.

That is the result of building his position earlier this year to take advantage of other investors' disparaging of banks after the Fed began raising short-term interest rates.

"The market did a knee-jerk. The consensus view was to sell banks because rates were going up, although the record shows banks don't do badly in the early part of a rising-rate period," he said.

"And they outperformed at certain points until the big selloff began in early September," he said.

But Mr. Walczak has not added to his position as bank stocks slipped in value this fall.

"In the financial sector, the banks right now raise the most concerns for me," he said, citing special worries about future revenue growth and prospective credit problems.

"Banks are basically late-cycle cyclicals, and an unfriendly Fed could do as much damage to bank earnings as it could to earnings of Chrysler or Phelps Dodge," he said.

Vontobel USA's largest bank stock holding is Bank of Boston Corp., followed by Shawmut National Corp., BankAmerica Corp., Chemical Banking Corp., First Union Corp. and Comerica Inc.

Vontobel holds a stake in Golden West Financial Corp., a thrift based in Oakland, Calif., that is noted for its efficient operations.

It also has positions in two Korean community banks in Los Angeles, California Center Bank and Hanmi Bank.

"We invested in those banks following the Los Angeles riot and at the onset of the California recession," he said. "They are a strong holding, but a limited one because of the liquidity issue."

At the peak of the long bank stock rally that began in late 1990, Vontobel's portfolio was 40% in banks.

Mr. Walczak has since pared it back to selected superregional banks because they are "more analyzable" than money-center institutions.

Financial stocks overall currently make up nearly 54% of the Vontobel portfolio.

Mr. Walczak has holdings in nearly a dozen insurance companies, including Torchmark, Lincoln National, Chubb, and Old Republic.

Also noteworthy in his portfolio are large stakes in both the Federal National Mortgage Association and Federal Home Loan Mortgage Corp.

Fannie Mae represents a whopping 9.8% of the portfolio and Freddie Mac 5.9%.

The money manager said he does not expect earnings at government-sponsored enterprises to be seriously affected by rising rates.

He also thinks that the "political risk" to their operations is overstated. "We own the largest allowable piece of Fannie Mae," he said. "If we could, we'd own more. We like the management a lot and think the stock is a great investment."

Mr. Walczak said during an investment conference last month that Vontobel had an unusually large 25% cash position in its portfolio because attractive investments have been hard to find.

The portfolio manager adheres to the investment maxim of Warren Buffett that equity investments must make sense not only in relation to level of other stocks but on an absolute valuation basis as well.

"With higher interest rates, we are discounting back future earnings at less favorable rates," he said. "The present value of many equities is simply worth less today than a year ago, and this offsets much of the benefit of their market prices having fallen."

Like many on Wall Street, the Vontobel manager expects further interest rate hikes from the Fed.

And he is not hopeful of a "soft landing" for the economy.

"Once released, economic growth tends to run unbridled until forcibly, and usually painfully, reined in the Fed," he observed. "Economic gallops don't typically dissipate into civilized trots for the welfare of the financial markets."

Mr. Walczak, 41, joined Vontobel in 1988. Previously he worked at Lazard Freres Asset Management and Sanford C. Bernstein & Co. in New York.

He was also a financial analyst at Ford Motor Co. and on the corporate treasurer's staff at General Motors Corp.

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