Growth equity is having its day in the performance rankings for institutional portfolios, according to the Pensions & Investments' Performance Evaluation Report.
Small- and midcapitalization growth managers were buoyed by a continuing rally in technology stocks, which is becoming a long-term theme for managers.
During the second quarter, eight of the top 10 managers invested in growth stocks; during the same period last year, seven of the top 10 managers invested in value equities.
Many managers say the slowing economy favors growth stocks. They also point out technology companies continue to push innovation, which is being rewarded in turn by rising earnings and rising stock prices.
Small-cap stocks are driven by earnings growth, and that stands out in a slow-growth economy, said Scott Johnston, chief investment officer of Apodaca-Johnston Capital Management Inc., San Francisco. The highest growth companies will tend to be young companies with exciting products and services, he said.
Apodaca-Johnston's small-cap equity growth portfolio was third for the year and five-year periods and second for the three- and 10-year periods ending June 30. The portfolio returned 63.73% for the year and 35% for three years, 33.37% for five years and 26.98% for 10 years. All returns for more than one year are compound-annualized.
Technology will remain a strong investment theme for the remainder of the century, said Alan Dworsky, principal of Mt. Auburn Management, Boston. Contrary to what some analysts are warning, the sector is not peaking, he said.
"I think the digital revolution that is under way is a once-in-a-lifetime opportunity which every institution needs to participate in."
Mt. Auburn's concentrated midcap growth portfolio was the top performer for the quarter, with 26.01%; fifth in the one-year period, with 56.36%; third in three-year rankings with 39.82%; and second in the five-year ranking with 36.47%.
The portfolio concentrates on 10 stocks and has favored technology issues heavily for about three years, when it began rotating out of health care, said Mr. Dworsky. The best area within the technology sector during the quarter was semiconductor manufacturing, he said.
The firm's best performing holding this quarter was Informix Corp., a software company whose stock split 2-for-1. On a split-ad- 20
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justed basis, the stock rose 48%, from 171/8 March 31 to 253/8 on June 30. Mt. Auburn also did well with Texas Instruments Inc., as well as Oracle Systems Corp.and Lotus Development Corp., which was acquired by IBM Corp. during the quarter.
Managers also noted health care is poised to become an emerging sector, thanks to the demographic pressures of an aging population.
Kopp Investment Advisors, Edina, Minn., is "nibbling" in the health care sector, but hasn't found any stocks to invest in, said President Lee Kopp.
The market is starting show renewed interest in the health care sector, although there is a "gigantic cloud over the group," including the prospect of increased price competition and government intervention, said Mr. Kopp. Within the health sector, health maintenance organizations are not doing so well, but medical devices and small biotechnology companies provide better opportunities, he said.
In the managed account growth category, Kopp Investment's emerging growth equity portfolio was the top performer in the one-, three-and five-year periods with respective returns of 88.04%, 58.57% and 45.75%. The Kopp portfolio was also the No. 1 in the first quarter of this year.
The Kopp portfolio began rotating into the technology sector in 1992 at the expense of health care and financial stocks. Its largest holding is ADC Communications Inc.; one of its best performers was PictureTel Co., which Mr. Kopp noted now trades at $59, up significantly from $24 at the start of the year.
The portfolio looks for small-and midcap companies - capitalizations of $50 million to $1 billion - that can grow at a rate of 15% to 20% a year and are followed by a maximum of three analysts. It sometimes bends its capitalization limit for some positions, such as some small holdings of Motorola Inc., he said.
Apodoca-Johnston's portfolio, meanwhile, has 65 holdings across approximately 25 industries, with consistent exposure across all industries. But the excitement is in the technology, communications, medical and specialty retail areas, said Mr. Johnston.
The portfolio's technology winners included , Chips and Technologies Inc., Seeq Technology Inc., Boca Research Inc., MacroMedia Inc., PictureTel Corp. and Trimble Navigation Ltd.. Holdings in other industries that also performed well included pharmaceutical companies Dura Pharmaceuticals Inc. and Columbia Labs Inc., restaurant chain Landry's Seafood Restaurants, boating supplier West Marine Inc., video rental company Hollywood Entertainment Corp., shoe retailer Just for Feet Inc., specialty retailer Garden Ridge and clothing retailer Quicksilver Inc.
Growth products also dominated among the commingled funds. The capital growth equity fund of The New England was No. 1 for the quarter, at 20.06%. The top performer for the year was the small-cap growth fund from The TCW Group Inc., Los Angeles, with 49.31%; it was also sixth for the quarter and the three-year period, with 13.96% and 24.18%, respectively.
The highest-ranking value equity product for the quarter was Equity Fund S from Qualivest Capital Management, Portland, Ore., which ranked eighth overall with 13.77%. Qualivest was also the top value performer for the five-year period with 22.21%. But its 29.36% one-year return placed it second after the small-cap equity fund from Boatmen's Trust Co., which returned 30.03% for the one-year period.
Qualivest was almost triple weighted in technology relative to the broad market, and it is also overweighted health care, said Timothy Leach, president and CIO.
"We're staying with technology. That's one of the fundamental drivers for us," said Mr. Leach."We see a lot of value for us. It's a longer-term theme for us."
High-performing holdings in the sector include peripherals makers Applied Magnetics Corp. and Cognos Inc., and software companies Rational Software Corp. and Gandalf Technologies Financial stock winners included Foothill Group Inc., an asset-based lender, and Freemont General Corp., an insurance and asset lending company.
Among managed accounts, the international equities portfolio of Simms Capital Management, Greenwich, Conn., was the best for the quarter and fourth for the year with 15.08% and 15.78%, respectively. The international research equity portfolio of Wellington Trust Co., Boston, reversed positions, ranking fourth for the quarter and first for the year with respective returns of 10.58% and 22.39%.
Among global equity managed accounts, Bee & Associates, Denver, was No. 1 in the quarter with 14.8%; it also ranked third for the year, second for the three-year period and first for the five-year period. Simms Capital's global equities portfolio was first for the year with 25.18%.
The median return for the 756 managed equity accounts in the PIPER universe was 8.8% for the quarter; the one-year median return was 22.4%, the three-year median was 14.7% and the five-year median 13.2%. The 270 commingled accounts in the PIPER universe showed a median return of 8.9% for the quarter, 22.8% for the one-year period, 13.3% for the three years and 12.3% for the five-year period.
By comparison, the Standard & Poor's 500 Stock Index returned 9.55% in the second quarter, 26.07% for the year, 13.26% for the three years and 12.09% for the five years. The PIPER numbers are calculated by Rogers, Casey & Associates, Darien, Conn.