Picking Good Financial Stocks; FBR's Ellison Focuses on Small, Well- Managed Lenders
David Ellison took about three years to go from serving customers as a bank teller in upstate New York to helping Peter Lynch pick financial stocks in the 1980s for the Fidelity Magellan Fund, the biggest U.S. equity fund of the time.</br></br>"They saw I had bank experience on my resume so they said, you're the banking analyst," Ellison said in an interview. "And then I got a look at the thrifts that Peter owned and started crunching numbers."</br></br>Ellison, 46, left Fidelity Investments in 1996 and today manages the top-performing specialty-finance mutual fund of the past five years, according to data compiled by Bloomberg. The $646 million FBR Small Cap Financial Fund has risen at an annual rate of 22 percent since April 1999, led by holdings in companies including Washington Federal Inc. and Hawthorne Financial Corp.</br></br>The banking industry and funds that own financial stocks have benefited from an increase in corporate takeovers and the lowest interest rates in 45 years, Ellison said. Lynch, 60, who quit as manager of the Magellan fund in 1990, taught Ellison to separate good companies from bad companies, and to maintain confidence in his stock picks even if the share prices dropped.</br></br>Ellison focuses on companies with market values of less than $3 billion that have a low cost of capital and a low ratio of expenses to assets, rather than on companies that are reporting the highest revenue growth. He also scrutinizes a bank's borrowers to avoid risky lenders.