Takin’ Care of (banking) Business
There’ve been a lot of blog posts and TMF articles recently about the health of the banking industry and whether or not it’s time to start buying. I really don’t want to rehash all that with this blog, but do want to review an option other than individual stocks or ETFs for investors interested in adding banks to their portfolios.
During the Strategy Lab Open competition last year, one of the competitors mentioned a bank closed-end fund, BTO. For those of you in my generation, that isn’t Bachman Turner Overdrive, it’s the John Hancock Bank and Thrift Opportunity Fund.
If you’re not familiar with closed-end funds, they’re similar to open-end mutual funds, but the number of shares is fixed and they trade like a stock or ETF. Because they don’t create or dissolve shares to meet demand, closed-end funds usually trade at a premium or discount to net asset value (NAV).
BTO would appeal to an investor who was interested in having a basket of banks in their portfolio, wants professionals picking those banks and wants to buy it at a discount. As of market close on 5/11, BTO was trading at $13.11 with a NAV of $15.19 or about a 14% discount.
The fund’s top holding on 31 March was Cullen/Frost Bankers (CFR) followed by BAC and a mix of other regional and large banks. The top ten holdings accounted for less than 40% of the funds assets, so the total portfolio has to be a pretty broad sweep of banks.
I compared BTO price performance to the Financial Select SPDR (XLF), SPDR KBW Bank ETF (KBE) and SPDR KBW Regional Bank ETF (KRE) over the past 3 months, year-to-date, 6 months, 1 year and 2 years. It wasn’t the best or worst of the bunch for any of those time periods.
The biggest advantage I see to buying this fund over one of the ETFs or picking a bank or two on your own is the discount to NAV. That 14% should offer some cushion and, if demand for bank stocks picks up, it’s plausible that the underlying assets would go up while the discount contracts giving investors a double shot of gains.
For the investor who wants to add some bank stocks, BTO is a viable option to picking your own or buying one of the ETFs. With a track record that’s only in line with the ETFs, it’s hard to make a strong case one way or the other for this fund. However, it may appeal to investors who prefer professional management over indexing and who want a broad basket of bank stocks in their portfolio.