Over the last month or so, the Mutual Fund Site has had a lot to say about the financial services industry, whether we were bragging about our top small cap fund pick for 2010 (for those who have not read the post, the fund in question is the Ivy Small Cap Value fund), talking about the importance of dividend funds in building a profitable portfolio, or tooting our own horn about how we did a great job applauding Dryden’s approach with financials.

To tie these areas together, let’s consider that our 34% of our small cap fund pick for 2010 consists of regional financial services companies, many of which contribute heavily to the fund’s average dividend yield of 2.8%; many dividend funds will rely heavily on financial services companies whose stocks have become devalued to the point that the dividend yield alone makes them attractive assets to own; and Dryden’s Financial Services fund owns a substantial amount of high-dividend paying Canadian bank stocks.

The point above may not be obvious.

What we have here is something of a reverse-engineering problem. Consider that Canadian banks have been touted as the most solid in the world and they pay healthy dividends. Consider that dividend paying stocks are instrumental in ensuring healthy returns, whether inside or outside of a mutual fund investment. And consider, lastly, that Canadian banks are heavily involved in the retail banking segment of their  country, just like the regional banks held in the Ivy Small Cap Value fund are. In fact, those financial services firms in the Ivy fund are doing exactly what Canadian banks are doing – lending responsibly to Joe Public so he can go and buy himself a home, car, boat, whatever and get the economy turned around.

The point above might make a little more sense when you consider that regional banks are an important party in the economic recovery efforts that are being promoted by US officials like Barack Obama, Timothy Geithner, and a host of others who have taken a hard-nose approach with the “big” banks who are often blamed for bringing an end of the last economic boom and practically killing the global economy. In fact, a lot of these officials are trying to convince these big banks into behaving the way these smaller banks are behaving.

So what might that mean for the regional banks?

Well, it could be acquisition for one thing. Canadian banks, who conduct business in a similar manner as these regional banks, have been acquiring some of these regional banks for some time (and now with the US dollar as low as it has been, the Canadian Banks’ purchase power has increased) such as TD Bank purchasing Commerce Bancorp, an award-winning regional bank based out of Cherry Hill, NJ, in 2007.

More likely, however, is that these smaller banks, which pay bigger dividends (based on dividend yield) than their big bank counterparts like Citi and Wells Fargo, will have the support and encouragement of government. They are already operating the way the government would like to see them operate; they already understand responsible lending practices, they are already profitable and fiscally strong (one in particular has increased its equity value by more than 50% over the past two years alone!). The government should love these players.

And, most importantly, when the economy turns around and people start waiting in line for mortgage approvals, credit card approvals and other types of credit or credit-related services, these regional banks will see their income increase exponentially. Why? Well, they are already profitable and the economy is just slowly finding its feet.

It’s a perfect situation for mutual funds like the Ivy Small Cap Value fund (we went so far as to call buying this small cap fund a no-brainer). And for the strong-willed investor with the right risk tolerance, time horizon and investment objectives, it becomes and easy lesson in investment strategy, one that requires very little advanced research. It’s almost the best-kept secret in the mutual fund space (except we exposed it, and we are always proud to help out). And if you are not sure how to get your hands on these stocks, just head on over to Ivy and let them do the number crunching and trading for you.

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