2009 is coming to an end, and a lot of investors are breathing a sigh of relief. With job losses diminishing and more signs that the economy is stabilizing, hopes are high that next year will finally usher in some much-needed economic growth. It appears that optimism is spreading throughout the ranks of professional money managers -- unless you're talking about the prospects of one sector in particular.
What a difference a month makes
The most recent Bank of America (NYSE:BAC) Merrill Lynch fund manager survey found that 80% of respondents believe that the world economy will see positive growth in 2010, up from only 69% just a month earlier. The 213 fund managers polled for the survey also predict equity markets will return 7.7% next year, based on the average of survey responses. Another bright spot reveals that manager expectations for corporate profits are at their highest level since December 2003.
But there is one notable sector that fund managers are shying away from in the coming year -- financials. A net 28% of survey respondents are underweight in financials, up from just 11% the month before. Apparently, a whole lot of industry insiders don't think our troubled financial sector is out of the woods just yet. And they may be right.
Can you spare a dime?
Being bearish on financials isn't really too contrarian of a call to make right now. After all, many of the big-name players that got beaten down to within an inch of their lives last fall have staged strong rebounds this year. Wells Fargo (NYSE:WFC), Goldman Sachs (NYSE:GS), and JPMorgan Chase (NYSE:JPM) have all more than doubled from their March lows. The doomsday scenario has likely been avoided, and this year's rally has worked out some of the excessive fear-based pressure on these stocks.
But looking ahead, the future is anything but sanguine for the financial sector. While they have wobbled back from the brink of disaster, most large banks in this country are still in a heap of trouble. They have yet to clear a large portion of toxic and non-performing loans off of their books. Losses and net charge-offs are still eating away at balance sheets. Hampered by these liabilities, big banks have been hoarding cash and tamping down on lending, which will cut into interest income in the coming year. This crisis wasn't created overnight, so it's going to take some time, and much more of a financial hit, to fully clean up the mess and get this sector back to full health.
Go west, young man ... or east
But while financials may end up on the injured reserve list for quite some time, that doesn't mean there aren't pockets of opportunity in this sector -- you just might need to travel outside of U.S. borders to find them! One investment maven who has been singing this song is Marty Whitman of Third Avenue fame. Ever the contrarian, Whitman has loaded up his Third Avenue Value Fund (TAVFX) with financial names -- to the tune of two-thirds of assets, according to the most recently available portfolio data. A whopping 40% is dedicated to Hong Kong real estate firms like Henderson Land Development and Cheung Kong Holdings. Whitman feels these companies are well-capitalized and relatively cheap, and their exposure to fast-growing mainland China should offer significant growth opportunities in the coming years. Another top 10 holding that pops up in the fund is Canadian money manager Brookfield Asset Management (NYSE:BAM), which has built a remarkable portfolio of infrastructure and power assets using a long-term, strict value investment process much like Whitman's own.
To be fair, Whitman does make room in his portfolio for a few domestic financial names like real estate operations firm Forest City Enterprises (NYSE:FCE-A) and Bank of New York Mellon (NYSE:BK). Since Whitman looks for "safe and cheap" companies, the fact that he's finding something to like in certain areas of the financial sector seems to imply that there may be a few relative bargains out there in this sector -- if you want to go out on a limb a little bit. However, given the current state of much of the financial sector, finding those few, rare worthwhile opportunities may be just slightly less difficult than finding that proverbial needle in a haystack.
Regardless of how the global economy shapes up next year, one thing is certain -- we've got a long way to go in repairing our broken financial system. There are pockets of opportunity out there in financials, to be sure, but those who venture out onto the scarred battlefield now may do so at their own risk.
