The powerful stock market rally touched off after Donald J. Trump’s electoral victory may still have legs. Financial stocks in particular may have room to run, even if the president-elect’s ambitious policy proposals end up rejected or diluted before reaching his desk.

Months before the election, fund managers like Lisa Welch, who leads the team responsible for the John Hancock Regional Bank Fund, faced a cloudy picture of the U.S. financial sector. “People were talking about going into negative interest rates several months ago,” Welch says. “There was no belief that this sector was going to end up performing well.”

Since the election, U.S. equities have surged, with indexes like the Dow and the S&P 500 rising more than 6%. During this period, the S&P 500 enjoyed the biggest one-month rally since its inception, while the Dow flirted with the historic 20,000 mark.

To a large extent, financial stocks have led the rally—the iShares Financials ETF and the Financials Select Sector SPDR Fund both ended the last quarter of 2016 with a rise of almost 18%, while the Vanguard Financials ETF enjoyed a 20% increase. In the same period, the SPDR S&P Bank ETF (KBE) and the SPDR S&P Regional Banking ETF (KRE) each posted returns of more than 30%.

The $1.5 Billion John Hancock Regional Bank Fund
(FRBAX) was well positioned to take advantage of the run. As its name suggests, the fund invests most of its assets in regional banks and lending companies. As of January 6, it posted a three-month return of 30.1%. Over the longer term, the fund has returned 11.48% over the past three years and 20.28% over the past five. Its top holdings include JPMorgan Chase, U.S. Bancorp, SunTrust and PNC Financial Services Group.

“We’re buy-and-hold investors; we try to invest for a long time,” Welch says. “We look for relative value in good companies, and we think that our process has led to outperformance.”

Managing a bank fund is also advantageous in a rising rate environment, adds Welch.

In December, the Federal Open Market Committee increased the federal funds rate by 25 basis points. In their recently released minutes, Fed governors indicated they were feeling more hawkish about the economy and the potential impacts of fiscal stimulus under a Trump administration.

“It seems like they could potentially be faster at increasing interest rates than anyone had thought prior to the election,” says Welch. “Higher rates are a positive for most banking companies. It should help banks manage their interest margins and ease some of the pressure they’ve been under during the low-rate environment.”

There seem to be sufficient economic tailwinds to keep the upward trend in rates, says Chris Davis, who manages the Davis Financial Fund for Davis Funds. “The Fed has proved to be a very poor prognosticator,” Davis says. “If you look at their comments, they haven’t been good predictors of the direction of the economy or the direction of interest rates over the long and medium term. We would never call a top or bottom, but we do have high confidence that over the next decade, interest rates will rise significantly higher than they are today.”

The $1 billion Davis Financial Fund (RPFGX) celebrates its 25-year anniversary in 2017. As of January 6, it posted a three-month return of 12.6%. Over the longer term, the fund has grown by 10.85% over three years and 15.6% in five. Its top holdings include Markel Corp., Wells Fargo, Visa, Chubb and JPMorgan Chase.

The Fed appears to be targeting three or more rate hikes in 2017, each of which would help pad the earnings of banks and traditional financial firms. The federal funds rate increased to 0.5%; it was the second time the Fed has raised the measure since the 2008 financial crisis. In the interim, lending rates have hovered near a bottom.

So low, says Dave Ellison, co-manager of Hennessy’s large-cap and small-cap financial funds, that banks struggled to squeeze revenues from their main business lines. “Over the past three-to-five years, interest rates were so low that they were starting to eat into the embedded profitability of the financial industry, which is the spread between deposits and loans,” Ellison says. “At the end of the day, without a suitable spread between the two sides of the balance sheet, you don’t have an industry.”

The Hennessy Large Cap Financial Investor Fund (HLFNX) attempts to select the best financial companies in the U.S., with its top holdings mostly consisting of banks. As of January 6, the fund had grown by 23.5% in three months. On a longer-term basis, HLFNX has grown by 5.74% in three years and by 15.45% over five years. Its top holdings include Bank of America, Comerica, SunTrust, Fifth Third Bancorp and Citizens Financial Group.

The Hennessy Small Cap Financial Fund (HISFX) typically invests in financial stocks with less than $3 billion in market value. As of January 6, the fund posted three-month returns of nearly 25%. Over the longer term, HISFX has returned 13.6% on a three-year basis, and 18.59% on a five-year basis. Its top holdings include Hingham Institution for Savings, Brookline Bancorp, Midland States Bancorp and Washington Federal.

The rally wasn’t all Janet Yellen’s doing—all of the managers agreed that Trump’s campaign promises and policy proposals have acted as catalysts. They anticipate lower corporate taxes, fiscal stimulus and a possible easing of regulations, all of which could extend the rally.

Financial stocks, banks in particular, might benefit from Trump’s presidency more than any other economic sector. On the campaign trail, Trump promised to reduce the statutory federal corporate income tax from 35% to 15%—while many businesses use deductions and deferrals to reduce their tax burden, banks often experience marginal rates of more than 30%. “A company like Wells Fargo is almost entirely U.S.-based; they don’t enjoy lower tax rates overseas on most of their earnings, so any lowering of corporate taxes will be a greater benefit to them than it would a multinational,” Davis says.

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