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Funds profit in credit war
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August 27, 1999: 6:15 p.m. ET
Bank One's plunge this week doesn't stop two winners from buying more
By Staff Writer Martine Costello
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NEW YORK (CNNfn) - The battle of the credit card companies heated up this week when shares of Bank One plunged 25 percent, but fund manager Gilbert Giordano is doing some wartime buying.
And Giordano, manager of the top-performing Titan Financial Services Fund, isn't the only one.
"The credit-card war is a serious one," Giordano said. "(But) I think Bank One is a good buy."
Bank One 's (ONE) stock took a dive on Wednesday after it warned that its credit-card unit would pull earnings down 8 percent lower than Wall Street expected.
The news was a blow to the sector as analysts wondered about the fierce competition between credit card issuers for customers. At the same time, Americans are falling more into the red and saddling credit-card businesses with higher uncollectable debts.
Capital One Financial (COF) lost about 15 percent this week, while Metris Cos. Inc. (MXT) gave up about 13 percent.
Sounds like a bleak week. So why are some money managers buying?
David Dreman, manager of the Kemper-Dreman Financial Services Fund, said investors overreacted after the Fed raised short-term interest rates as expected by a quarter percentage point on Tuesday.
"There's a lot of nervousness with what interest rates are doing," Dreman said. "Financial stocks are up 3 percent one day and down 3 percent the next."
People tend to give up on financial stocks even though they perform well over time against other types of stocks, like technology, Dreman said. The fund has 4.9 percent of its portfolio in Bank One, though it is staying out of pure credit card plays.
"Bank One has got one of the best credit card divisions," Dreman said. "The perception of investors is that financial services stocks are affected by interest rates and they're not."
The Titan Fund has $27 million in assets and is up 14.93 percent year to date as of Wednesday's market close, according to fund-tracker Morningstar. The Kemper-Dreman fund has $92 million in assets and has gained 6.91 percent in the same time, Morningstar said.
The Titan fund is the third-best performer out of a category of 51 funds at Morningstar, while Kemper-Dreman is ninth on the list.
Giordano said he also added to his holdings in Capital One and Metris.
"I own Capital One and I'm holding onto it," Giordano said. "I think Metris is an unusually good buy."
Analysts had mixed reviews of new disclosure rules on personal trading by fund managers that were approved by the Securities and Exchange Commission this week.
The regulations require more oversight of personal trading, but allow managers to continue investing in initial public offerings and private placements.
Burt Greenwald, a fund-industry analyst with B.J. Greenwald Associates in Philadelphia, said he'd support an outright ban on managers investing in IPOs. While he doesn't think there is a widespread problem with such conflicts of interest, perceptions can be just as damaging.
"Anything that suggests the possibility of favoritism really begins to work against the public confidence," Greenwald said.
But Reuben Brewer, manager of mutual-fund research at Value Line Inc., thinks the rules strike the right balance.
"It's a tough tradeoff between infringing on the individual manager and protecting the rights of investors," Brewer said. "Managers have a right to trade. If you take away that right, they're going to quit."
A few weeks ago redemptions at high-yield bond funds hit record levels. But for the first week since July 19, the category is getting a whiff of new money, according to Trim Tabs.com, a California researcher that tracks the figures.
For the week ending Aug. 23, junk bond funds had inflows of $279 million, said Carl Wittnebert, director of research.
"The market has stabilized," Wittnebert said.
Finally, here are some winners and losers for the week in Lipper Analytical Services' financial services category.
At the top of the list is the Titan Fund, up 2.33 percent for the week Aug. 19 through Aug. 26 and up 13.77 year to date as of Thursday. Next is Fidelity Select Portfolios Brokerage and Investment Management Portfolio, up 2.26 percent for the week and up 16.18 percent year to date; and AIM Global Financial Services Fund, class A shares, up 2.08 percent for the week and up 12.79 percent year to date.
The three top losers are Rydex Banking Fund, adviser class shares, off 1.54 percent for the week and down 6.75 percent year to date; followed by Mutual Financial Services Fund, down 1.42 percent for the week but up 8.67 percent year to date; and John Hancock Regional Banking Shares, off 2.34 percent for the week. The year-to-date figure wasn't available.
-- Staff Writer Martine Costello covers mutual funds for CNNfn.com. If you have any comments about mutual funds, you can contact her at cnnfn.interact@turner.com
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