(March 9) – “When it comes to picking stocks of small-capitalization financial companies, mutual-fund manager David Ellison doesn’t look for aggressive growth plans,” writes Michael Butler in today’s Wall Street Journal.

“The portfolio manager of the FBR Small-Cap Financial Fund said he isn’t interested in companies that are branching out of their traditional lines of business in search of growth. “I want to own companies that are making loans in their own market area and have been making the same type of loans for a long time,” he said.

“’They know their markets, they’ve been around a while and been through ups and downs before,’ Mr. Ellison said.

“The approach has worked well for him. The FBR Small-Cap Financial Fund, which he started in 1996, has posted a return of 5.82% so far this year, following a return of 32.4% in 2000, according to mutual-fund research firm Morningstar Inc. The four other specialty financial funds followed by Morningstar have posted an average return of 2.74% so far this year.

“Mr. Ellison credits changes in the economy for the fund’s strong performance over the past year. The fund recorded negative returns in 1998 and 1999, after a 58.4% return in 1997.

“’The stocks [in the sector] went down a fair amount in ’99 because they weren’t technology,’ Mr. Ellison said. Also, consolidation in the industry slowed sharply in 1998 and 1999, he said. Consolidation activity has picked up somewhat, but the biggest factor in the fund’s improved performance is lower interest rates.

Financial companies in general will benefit from interest-rate declines, Mr. Ellison said. Moreover, he maintains that his small-cap fund offers a leverage opportunity, because if investors buy stocks of his target companies, the stocks’ prices could go up sharply.

“’The average market caps on these stocks are small,’ about $125 million currently, he said. ‘We’re not talking about Bank of America.’”