Investment managers specializing in global equities and domestic small-capitalization stocks were among the top performing equity managers for the fourth quarter of 1993, and most market observers believe the trend will continue in 1994.
Small- and mid-cap money managers or domestic managers with a healthy global allocation comprised the bulk of the top performing managers in the Pensions & Investments' Performance Evaluation Report overall equity universe for the fourth quarter and calendar year.
"Value managers typically did better than growth, but the hot button we saw was a lot of interest in small-cap value managers," said Laurie Bagley, consultant in the asset consulting division of Sedgwick Noble Lowndes, New York. "There was a lot of interest
expressed in that direction - in small-cap and mid-cap value managers."
While growth stock managers and growth stocks had been out of favor for several months, said Ms. Bagley, "during the fourth quarter, growth actually made somewhat of a comeback." She said the growth component of the Standard & Poor's 500 Stock Index was up 4.4% for the quarter.
Growth stocks may have gained during the fourth quarter because of the threat of an interest rate increase, she said, which hurt such sectors as public utilities and other high-dividend companies, where value managers tend to migrate.
Crabbe Huson Group Inc., Portland, Ore., finished in the top 10 overall PIPER equity managers in both separate account and commingled funds for the fourth quarter, with returns of 14.2% and 8.23% respectively. Its commingled fund finished in the top 10 for the year, with 27.1%.
Richard Huson, chief investment officer, said its $41 million small-cap portfolio, as well as its commingled PNT equity fund, follow a contrarian approach.
Mr. Huson said stock market volatility in the last two years "has created a lot of opportunity for us."
Most small-cap managers, he said, try to identify growth situations, but one advantage of following the contrarian approach is "a lot of stocks we own were not always small-cap companies, some were medium cap at one time and encountered some misfortune and the price went down. The area we are working in is not as heavily picked over. This environment (high market volatility) is tailor-made for a contrarian approach." The approach worked well for Crabbe Huson in 1992 and 1993 "and probably (will) in 1994," he said.
The median capitalization in the small-cap fund is about $500 million, while the median cap size in the equity fund is $5 billion.
"The equity fund also follows the contrarian approach, we are just doing it with larger stocks," he said. "It's a good time for people to look away from the crowd."
Significant holdings in the firm's equity portfolio include IBM Corp., Consolidated Freightways Inc., The Equitable Co. and Cypress Semiconductor Corp.
For the quarter, the S&P 500 returned 2.3%, while the S&P Midcap 400 Index returned 2.7%, and the Russell 2000 index, 2.6%. For the year, the indexes returned 10.1%, 9.1% and 18.9%, respectively. Another small-cap manager that performed well in the PIPER commingled fund universe for the fourth quarter and year was the Boston Co. Institutional Investors.
The Boston Co. small-cap equity fund follows a basic strategy of "buying inexpensive high-quality companies on a valuation basis with high returns on equity," said Dave Diamond, portfolio manager. The fund returned 9.6% in the quarter and 41.6% for the year.
Mr. Diamond said he also looks for companies that might have undergone some restructuring, "implying that things are getting better," and companies with "significant insider buying" and with improving earnings results.
The fund buys companies with capitalization of $750 million and less, he said.
Significant holdings in the Boston Co. portfolio include Texas Industries Inc., Southdown Inc., Builders Transport Inc. and Offshore Pipelines Inc.
In keeping with the fourth-quarter resurgence of growth stocks, the Trusco Retirement Sunbelt Equity Fund finished near the top of the fourth quarter PIPER commingled equity universe, with a 9.6% return.
Douglas Phillips, president of Trusco Capital Management, Atlanta, said the $125 million fund, managed by Jim Foster, invests exclusively in small and mid-cap growth companies in the South and Southeast, including Texas.
Mr. Phillips said the investment approach is "fundamentally
driven" and based on "strong internal research." The typical company in the portfolio has a history of profitability, "a strong balance sheet and excellent growth characteristics."
Some major holdings in the Sunbelt fund include Office Depot Inc., Atlantic Southeast Airlines and Inbrand Corp.
During the past year, U.S. domestic equity markets in general lagged those of foreign markets, and the attractive returns are causing increasing numbers of institutional investors to look overseas. The Morgan Stanley Capital International Europe Australasia Far East Index returned 0.9% and 32.9%, for the quarter and year respectively, and the MSCI World Index returned 1.7% and 23.1% for the respective periods.
Michael Shone, president of the consulting firm Pierce Park Group, Wilmington, Del., acknowledged the favorable performance results for small-cap managers, but said the major trend for investors over the past several months and continuing into 1994 is the international sector.
Marvin & Palmer Associates Inc., Wilmington, Del., finished in the top five among PIPER separate account managers for the fourth quarter with the 14.3% return of its U.S. equity portfolio. The performance, however, received a big boost from the portfolio's American depository receipt holdings. ADRs represent shares in foreign companies and are traded in domestic markets.
David Marvin, chairman, said about half of the portfolio consisted of ADRs, which were heavily concentrated in Mexican and Hong Kong companies.
He said the investment approach is "eclectic" and that "we go where we think we should be. We are not value or growth players, we are just good old fashioned investors. We are just good stock pickers and asset allocators."
Guild Investment Management, Malibu, Calif., also finished near the top among overall PIPER separate account managers for the quarter, with the 17.5% return of its aggressive grotwh fund. Montague Guild Jr., chairman and chief executive officer, said the results were aided by a healthy exposure to global markets.
"The performance of the fund was based on our exposure to global markets as opposed to U.S. markets," said Mr. Guild. The portfolio held significant positions in companies in Mexico, India, Hong Kong and Sweden. Mr. Guild said the portfolio held only 20% to 25% U.S. equities, while holding 35% to 40% European issues and the balance in Mexico, India and Hong Kong and other Pacific Rim companies.
Examples of some of the better performing issues in the Guild portfolio include Hong Kong companies such as Associated International Hotels Ltd. and Cheung Kong Holdings Ltd.
"The global equity markets will attract additional interest in the coming year. Some of the markets need a correction in 1994, but for the next 12 to 36 months, the money will be made in global equity markets," Mr. Guild said.
