Money Managers Dislike Bank Stocks Due to Derivative Exposure

“Above all stick with what you know,” Warren Buffettcautioned investors in a 1974 Forbes magazine interview. “Don’t get too fancy.”

Banks, in the view of some of today’s best-performing money managers, are too fancy — their businesses and finances too complicated to understand even as regulators have tried to make them more transparent. Investors owning few if any of the stocks in the group include Clyde McGregor, who runs Oakmark Equity and Income Fund, Delafield Fund’s John Delafield and Donald Yacktman of Yacktman Focused Fund.

The fund managers said they are frustrated by complex balance sheets stuffed with derivatives that make it hard to evaluate bank assets and how they will fare under different economic scenarios. They are also concerned that profits may be hurt by a slowdown in the economy, litigation over mortgage bonds and foreclosures, and new fee-crimping rules.

“We find it hard to believe the banks have cured all their bad asset problems, and they aren’t transparent enough for us to understand the risks,” McGregor, whose $20.5 billion fund beat 99 percent of peers over the past decade, said in a telephone interview from Chicago.”

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