Banks have been the best performing FTSE All-Share sector since the stock market began its rally on 3 March. This sector advanced 127 per cent between that date and 10 September, according to figures from F&C Investments.

It comes as financials fund specialist HIM Capital prepares to launch the HIM Income Fund on 15 October to invest in financial equities and bonds, with a 6 per cent target yield.

Jupiter Asset Management is also launching a global financials fund in the New Year, in addition to its Jupiter Financial Opportunities Fund and offshore Jupiter JGF Global Financials.

Meanwhile, New Star Financial Opportunities Fund, an investment trust, is preparing a share issue to increase its size, having recently voted to widen its investment mandate to a global basis. This is in contrast to some other New Star funds, which are being merged or wound up following their acquisition by Henderson.

However, Darius McDermott, managing director at Chelsea Financial Services, is not persuaded that banks will rally to the extent they have over the last six months and said they are unlikely to be as profitable as in the past. But he adds: "One of the things we have always liked is that financials is a broad sector that does not just include banks, but also insurance, asset managers, spread betters and financial advisers."

Because financials is comprised of a number of sub sectors McDermott feels comfortable recommending what is by definition a single sector fund, and says for this reason you can hold a financials fund throughout the economic cycle unlike, for example, technology or healthcare.

However, Martin Bamford, managing director at Informed Choice, said investors probably already have exposure to financial stocks via their other equity fund holdings, and a financials fund holding could result in over concentration.

Robert Lockie, investment manager at Bloomsbury Financial Planning, argues that there is no additional expected return above the market from taking risks such as sector bets with a financials fund, especially over the timeframe which investors should be invested in equities.

Tim Collyer, head of investment solutions at Falcon Group said: "If investing for the long-term, it is probably not a bad time to reinvest. If you are at all nervous or concerned it would be better to wait for markets and their valuations to match."
 
Ben Yearsely, investment manager at Hargreaves Lansdown said: "If we are moving into a recovering economy people will have more to invest and save so it could be a good long-term opportunity."
 
But he does not believe a financials fund should account for more than 5 per cent of a portfolio as financials feature in most other funds.

McDermott also believes in a 5 per cent limit with a long-term view, and said it is very important to choose a good manager. His preferences are the Jupiter Financial Opportunities Fund and New Star Global Financials Fund.

This is borne out over the shorter term: over one year Jupiter Financial Opportunities has benefited from using absolute return techniques, for example holding large allocations of cash and government bonds in the past year. While a number of financials funds did not perform well over one year to 28 September due to problems for financial stocks, Jupiter Financial Opportunities is second out of 98 IMA Specialist sector funds with 52.3 per cent, according to Trustnet data.

The Specialist Sector average is 10.1 per cent.

Another better performer is New Star Global Financials at 23 with 19.8 per cent, run by Guy de Blonay who has recently assumed management of New Star Financial Opportunities. Global Financials only had 22.03 per cent of its holdings in the UK as of 31 August, with diverse global exposure in contrast to Financial Opportunities which had 47.2 per cent in the UK as of 31 July.

Over five years to 23 September, meanwhile, seven financials funds feature in the top 32 performers of 98 Specialist Sector funds. Jupiter Financial Opportunities is seventh best performer with a 129.4 per cent total return, and New Star Global Financials is twelfth with 91.8 per cent. The sector average is 57.7 per cent.