CAN ONLY PRESS NOSES AGAINST WINDOWS FULL OF CHEAP SWEETS: CASH-POOR FUNDS EYE FINANCIALS

Financial stocks plunged almost 16% last quarter, and their price-to-earnings ratios are typically half that of the S&P 500. Yet money managers who are dying to buy these stocks don’t have enough cash to do so.

The reason? Investors yanked more than $4 billion out of financial services mutual funds through Aug. 31, causing their assets to shrink by almost 25% to $15.9 billion, according to Boston-based Financial Research Corp.

“The last 18 months have been a classic bear market,” says David Ellison, portfolio manager of the Arlington, Va.-based FBR Financial Services Fund, which has $30 million. “You have good companies, but nobody can own them because nobody has any money to own them.”

Hartford Life Inc. is a case in point.

The insurer should be celebrating rather than watching its stock sink.

The company, one of the biggest sellers of variable annuities, has posted nine consecutive quarters of double-digit earnings growth since its initial public offering in 1997. Yet its stock has plunged 25% from its high of $61.43 in August 1998. This year, it’s down 20% to $46.06, through last Tuesday.

“The market seems to yawn at the fact that we have been able to generate solid earnings growth,” laments Stuart Carlisle, director of investor relations.

Hartford is hardly alone. Investors jittery over higher interest rates and slower securities sales, including mutual funds, have been fleeing financials. Concerns over the Y2K bug and big brokerages’ competition from Internet rivals haven’t helped either.

“What’s hurt financials the most this year has been the prospect of higher interest rates,” says Maitland Lammert, a financial services analyst at St. Louis-based Edward Jones.

“A lot of the financial stocks have taken steps to insulate themselves from interest rate risk over the last decade. But the market doesn’t seem to be reacting that way,” she adds.

In the first half, the industry appeared to be recovering from the beating it took last year over the Russian default and the Long-Term Capital Management LP debacle.

The Standard & Poor’s Financials index rose steadily through June, but then headed south after the Fed raised interest rates. It plunged almost 16% in the third quarter, while the S&P 500 fell about 7%.

For the first three quarters, the financials index is down about 6%, while the S&P 500 is up 4.35%. Some of the biggest names, including Bank One Corp., now trading at around $35, and First Union Corp., trading at around $37, have been pummeled for earning less than analysts expected.

“We have to get the Street back in line with the reality of this business,” says Mr. Ellison.”It doesn’t always grow at double digits per year, and you can’t lend like crazy every year,” he says.

Today’s slump is a far cry from the heady days of 1997, when the S&P financials index beat the S&P 500, gaining almost 35%. That year marked the end of a five-year hot streak fueled by declining interest rates and a wave of big mergers.

“In general, the fundamentals are very good for the industry, but not as good as they were at their peak,” says Carl Dorf, manager of the $570 million Pilgrim Bank and Thrift Fund.

Mr. Dorf says he’d buy more Charter One Financial, which is down about 12.5% this year and currently trading at around $23, if only he had the cash. He says the Cleveland-based thrift, which has been buying other thrifts, is being punished because “the market hates acquirers.”

Ms. Lammert of Edward Jones says that Boston-based State Street Corp. has “excellent prospects,” yet its stock was down almost 8% through September and is currently trading at around $65.

No other segment of the industry has suffered more than insurance, especially property and casualty companies, analysts say.

The Robinson-Humphrey Life Insurance Index, run by Atlanta brokerage Robinson-Humphrey Co., is down about 10% this year.

The p/e ratio of the index — at 10.8 times estimated year 2000 earnings — is 42% of that of the S&P 500. That’s a 20-year low, says David O. Lewis, first vice president at Robinson-Humphrey.

Stocks like Hartford, Torchmark Corp. and American General Corp. have been dragged down with the rest of the group despite “positive fundamentals,” he says.

Still, rising interest rates may actually be good for financial services in the long run, says Mr. Ellison. “You can’t be making mortgages at 5% and be making any money,” he says. What’s more, many companies need to prove to investors that the loans they’ve churned out in recent years are sound, he adds.