WALNUT CREEK, Calif. - If and when the great bank stock selloff of 1995 begins, SIFE Trust Fund will be ready.
Preparing for the worst, the $515 million mutual fund based here has increased its cash position by an eye-popping 350% since May 1 - to nearly one-fifth of its entire holdings.
The reason: bitter memories of the bear market in banks in the second half of last year. SIFE's 13% gain through August fell into negative territory by Christmas as bank stocks careened downward amid rising interest rates.
The fund is determined not to be left hanging out to dry again when, as its managers fully expect, banking stocks fall back to earth later this year.
"When the correction occurs, we will not be hurt as much as if we were totally invested in bank stocks," said Scott Edgar, the fund's analyst. "The cash will then be redeployed to reacquire those names that have become cheaper as a result of the selloff."
So far this year, returns for the fund have been stellar, topping 27% as banks continue to plow forward, enjoying declining interest rates and a modestly growing economy.
But the fund managers expect the selloff to begin soon. Perhaps very soon, if second-quarter bank earnings results disappoint investors.
Asked precisely when the onslaught will commence, longtime portfolio manager Sam Marchese jokingly glanced at his watch and asked: "What time is it?" And newcomer Michael J. Stead, another portfolio manager, remarked, "We fasten our seat belts every day we come in here."
SIFE is also moving roughly 7% of its portfolio into consumer nondurables, like Coca Cola, as another way to brace for the downturn.
Not all observers agree this is the best strategy.
"While the (bank) stocks are not going to go up every day, it is not easy to fine-tune the portfolio for when the stocks will go down," said James Schmidt, portfolio manger for the John Hancock regional bank fund.
"We believe bank stocks are fairly inexpensive and over a three- to five-year period we will do well with them," he added.
Still, Mr. Schmidt concedes that bank stocks have gone into a second- half swoon to some degree during each of the last nine years. But he said he has no intention of changing the 10% cash position of his fund.
SIFE portfolio manager David Sloan believes the investment community is sure to be disappointed with bank earnings results, particularly if loan loss provisions are increased to account for higher loan demand.
Stocks in general are trading above what they are worth, he said, and some reality has to come back into the market. He suggested a downdraft in technology stocks might spur an overall market correction.
And while the bank stocks are rising in a favorable interest rate climate right now, Mr. Sloan added, a catalyst, such as weak earnings from shrinking margins, will eventually emerge to drive them down.
"The fundamentals of the banking industry are clearly deteriorating," he said. "In a quarter when investors' expectation are diminished, a correction will occur."
Mr. Edgar, the SIFE analyst, said one particular possibility for a disappointment could be U.S. Bancorp, Portland, Ore..
SIFE's handsome returns this year are due in no small part to its stakes in banks involved in several large mergers.
The fund has had large positions in Shawmut National Corp., Michigan National Corp., West One Corp., and First Fidelity Bancorp. all of which have been sold in recent multibillion dollar deals.
Two weeks ago, the fund created its own takeover list. All the names are small to midsize institutions, like Imperial Bancorp and Liberty Bancorp.
"Fund investors can't ignore the consolidation trend, and more and more we will take an active approach to identifying those companies that are underperforming yet still have potential to perform well," Mr. Edgar said.
SIFE's largest stakes are in regional banks, at least two of which - Bank of Boston Corp. and Integra Financial Corp. - are considered by Wall Street to be prime takeover candidates.
For the takeover list, covering 35 banks, SIFE will lower its standards for investments, Mr. Stead said.
In a normal bank investment, he said, SIFE looks for at least a 1.1% return on average assets, a return on equity over 15% and an efficiency level below 70%.
But among likely takeover candidates, a much more modest ROE of between 8% and 13%, an ROA between 0.8% and 1.1%, and an efficiency ratio over 70% will suffice.
At the very least, Mr. Stead added, if the bank is not sold, the performance should improve.
In smaller institutions, SIFE is now taking active roles in setting the direction of the institutions. While not on the scale of a Michael Price of Heine Securities, whose efforts to get Chase Manhattan Corp. sold have drawn much attention, SIFE nonetheless is pressuring the boards of small regional banks.
SIFE voted with Harry Brock in his unsuccessful efforts to get Compass Bancshares, Birmingham, Ala., put on the block earlier this year, and like many bank shareholders, plans to voice its opinions more forcefully.
Meanwhile, there are some important issues for SIFE itself.
The fund is distributed only in California, Hawaii, and Nevada. The company hopes to expand soon into contiguous states, but distribution is still limited. Banks are hesitant to sell the funds because of a 5% load fee, high by current standards.
And could SIFE itself be acquired?
The fund has increased assets 152% in the last five years. In 1991, returns were 47%, and in 1992 they were 34%. This year could shape up that way too, though the principals expect 15% or so.
Such a jewel, Mr. Sloan said, will be hard to hide from banks and other aggressors in the mutual fund industry.