IN FINANCIAL SERVICES, 'BORING IS IN' When investing in banking and finance, it's best to play it safe Forget about global financial supermarkets. Don't bother with rocket-scientist dealers in derivatives. Avoid Master-of-the-Universe traders. In the topsy-turvy world of financial services, the rule of thumb for investors is to play it safe. ''Boring is in,'' says Michael L. Mayo, a bank analyst at Credit Suisse First Boston. ''You are not looking to hit a home run in this environment.'' Caution is the watchword--because so much could go wrong. Global banks and brokerages are still grappling with turmoil in the markets--as demonstrated by J.P. Morgan & Co.'s announcement that it would not meet fourth-quarter earnings expectations. Domestic banks could see profits squeezed by lower interest rates. And difficulties in adapting computers to overcome the Year 2000 bug could erode earnings and disrupt merger plans. LAGGING BEHIND. Some analysts simply suggest investing in something else. Bank stocks, after all, trailed the overall market in 1998 and could do so again. ''I think they are going to be huge underperformers,'' says Charles W. Peabody, a bank analyst at Mitchell Securities. Still, some investors see safe-haven opportunities--usually in fee-earning businesses that benefit from the still relatively robust U.S. economy. The trick is picking your spots: finding situations rather than sectors. At Davis Financial Fund, for example, the top pick is American Express Co., says Kenneth Charles Feinberg, co-manager of the fund's portfolio. Feinberg says the appeal of AmEx is that it benefits from the U.S. propensity to pay with plastic. But it makes money from membership fees and transaction charges rather than from risky lending on cards. ''The key point is American Express has a consistent earnings stream,'' Feinberg says. Shelter from the storm also underlies the allure of Fannie Mae and Freddie Mac, the giant government-sponsored enterprises (GSEs) that buy mortgages and package some of them as securities. Salomon Smith Barney analyst Thomas O'Donnell says falling interest rates are boosting volumes at the GSEs, while upheaval in the market for mortgage-backed securities lets Fannie and Freddie buy new mortgages at lower prices. RUNNING FOR COVER. James K. Schmidt, John Hancock Financial Industries Fund manager, sees opportunity in the wave of insurance companies going public through demutualizations. He likes Reinsurance Group of America Inc., reckoning that as more life insurers sell shares, they will reduce their risks by buying reinsurance. Brown Brothers Harriman & Co. analyst Raphael Soifer suggests simply following the money by investing in U.S. Trust Corp., a private bank that manages funds for wealthy Americans. Given the international uncertainties, there is less enthusiasm for banks and brokerages with global reach. But some analysts say the big banks are worth a look based on their price-earnings ratios--which are low compared with the market, if not by historical standards. Chase Manhattan Corp., for example, has been trading at about 12 times earnings. Investors who avoid foreign entanglements by buying domestic banks could run into another problem: lower interest rates. The difficulty for banks is that their deposit rates are so low that they may not be able to push them down much more. The result, some analysts fear, is that banks' cost of funds could remain steady while their returns on loans fall. Nonetheless, Mayo recommends First Union Corp. as a way to preserve your capital, at least. Not very exciting--but that's the point: It could be that kind of year. By Gary Silverman in New York RELATED ITEMS TABLE: Picking Your Spots Return to top of story

Updated Dec. 17, 1998 by bwwebmaster
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