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Financials are riding high in the form book

After a torrid year in world equity markets, investment IFAs will be hoping the FSA is right to assert that past performance is no guide to the future.

Every Autif sector except for property has suffered a negative average return in the past 12 months. Another such year would probably start putting investment advisers out of business.

But hidden among the vaguely titled specialist sector, one group of funds has been quietly bucking the trend – the financials.

Led by Jupiter&#39s financial opportunities fund, which is currently among the top 10 performing unit trusts in the UK, the seven financial unit trusts have returned an average of around 15 per cent in the last 12 months.

Hargreaves Lansdown investment manager Ben Yearsley says: “The financial sector has been one of the best performers over the past year. Most of the financial stocks are value-based rather than growth, so they hit rock bottom in March 2000 and then rocketed over the past year.

“Financial funds are often misunderstood. People often assume they are just banks but they include a whole range of companies. Going forward, there is no reason not to invest in them either. The population is getting older and there is greater demand for savings and pension products, so financial firms are going to benefit.”

Yearsley is particularly keen on the Jupiter fund and believes manager Philip Gibbs is one of the best in the market. The fund&#39s credentials are certainly impressive. Launched in 1997, it has outperformed the MSCI World Financials index by more than 20 per cent each year and has delivered a return of around 37 per cent in the past 12 months.

According to Standard & Poor&#39s Fund Services, the fund has returned more than 110 per cent over three years – a feat its sector peers have taken five years to emulate.

Gibbs says there is a huge difference between stocks in the sector but believes his fund has the ability to spot the winners in all market conditions. He says: “I think financials on the whole would be quite weak if there was a severe recession but so would everything. It would also be difficult if there was a significant rise in interest rates.

“But in terms of the Jupiter financial opportunities fund, there is a significant chance we can outperform the index. If you buy the fund on a long-term view, you are buying my stockpicking ability.”

As it happens, signs of a severe recession no longer appear to be looming as they were earlier in the year. As a result, the financial sector looks in good shape to face the future.

As one of the fastest consolidating industries, as well as a sector which is undergoing constant restructure, there is clearly plenty of room for good stockpicking. But Gibbs is quick to point out that, for the same reasons, there is also a lot of room to pick the wrong stocks.

The performance differentiation between the sector&#39s funds bears this out. Over the past year, the MSCI World Financials index has grown by around 26 per cent. But while Jupiter financial opportunities has achieved 37 per cent, its rivals have all performed below the index.

JP Morgan Fleming&#39s offering, the biggest financial fund at£320m, comes in second with a return of around 24 per cent while the rest have produced only around 10 per cent or less.

The sector is still relatively small, with around£750m under management in the seven unit trusts, but two of these funds were launched in March this year. Despite the boost of having already been awarded a Standard & Poor&#39s A rating, Britannic&#39s financial fund has only managed to raise around£5m since March while M&G&#39s offering has taken an impressive£32m despite difficult market conditions.

Perhaps the biggest difficulty for financial funds – and sector funds in general – is that they are not easy to place in a portfolio. Most investors will already have exposure to the financial sector though their UK or other global holdings and will only increase the risk in their portfolio by overweighting.

Simpsons partner Andrew Merricks says: “To invest in any sector in isolation is dangerous. All you need is one bit of bad news and it can all fall out of fashion.”

Although it is clear sector funds should not dominate, most fund strategists admit there is room for 5 or 10 per cent in a balanced portfolio.

The success of funds such as Jupiter financial opportunities may well spark further launches over the coming year but the difference in performance shows it is only the sharpest stockpickers who will produce exciting returns from the sector.

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