Equity managers in the Pensions and Investments Performance Evaluation Report universe are seeing continued strong advances in their 1996 crystal balls.
During the third quarter, small-capitalization equity managers outperformed large-cap managers, fueled largely by strong movement in the technology sector.
While technology stocks are expected to remain in favor, some equity managers have started reducing their exposure to the increasingly volatile sector.
The median PIPER equity commingled funds manager returned 8.3% in the third quarter and was up 27.5% for the first nine months of the year.
By comparison the Standard & Poor's 500 Stock Index was up 7.95% in the third quarter and 29.77% for the nine months.
The small-cap sector, as represented by the Russell 2000, gained 9.9% in the quarter and 25.7% for the nine months.
The median PIPER separate account equity manager was up 8.5% for the quarter and 27.9% through September.
The top 10 PIPER equity managers in both the separate account and commingled universes were dominated by small-cap growth managers in the quarter and year ended Sept. 30.
Even though political battling over a budget compromise between Congress and the Clinton administration has some disturbing overtones, equity managers expect the economic backdrop of low inflation, low interest rates and slow growth to favor stocks in 1996.
Provident Investment Counsel, Pasadena, Calif., finished in the top position overall among PIPER commingled equity managers for the quarter with a return of 21.8%.
Provident also finished fourth overall for the one-year period at 49.3%, third for the three years with 31.35% and third for the five-year period with a return of 31.88%. All returns for periods of more than one year are compound-annualized.
TCW Group, Los Angeles, and Bankers Trust Co., New York, also finished among the top 10 overall PIPER commingled fund managers for the quarter, one-, three-and five-year periods.
The TCW small-cap growth fund finished second for the quarter with 19.35% and first for the year ended Sept. 30 with a phenomenal 57.99%.
It also was fourth for the three years at 30.23% and No. 10 overall with 28.45% for the five years. The TCW fund finished second overall for the 10-year period with 21.58%.
The Bankers Trust small-cap fund returned 49.16% for the year, making it fifth overall among PIPER commingled fund managers. The fund also was first for the three- and five-year periods with 32.3% and 36.2%, respectively.
Stechler & Co. topped the overall PIPER managed equity account universe for the quarter with 24.5%, followed by Robertson Stephens Investment Management, San Francisco, with 21.51% and Amerindo Investment Advisors Inc., San Francisco, with 21.3%. Amerindo also finished second for the year with of 73.3%.
Kopp Investment Advisors, Edina, Minn., topped the PIPER managed account universe for the year with a whopping 75.45% and was second for the five-year period with a compound annualized 59.3%.
Leroy Kopp, president and chief investment officer at Kopp Investment Advisors - which has $2.6 billion under management, $1 billion of which was added since January - said 80% of the portfolio is invested in the technology sector.
While technology stocks have become "incredibly volatile" in recent months "and will continue to be as we move forward as more money is poured in by institutions," the technology group remains the long-term theme at Kopp.
"We remain committed to the sector for the next three- to five-year time horizon," he said. "All our companies are midcap corporate America. We are looking for growth with some focus on value; we look for companies not well followed on Wall Street."
Technology "covers a lot of territory," he said. Kopp has a major commitment to the telecommunications sector.
Major holdings include ADC Telecommunications Inc., Tellabs Inc. and EMPI Inc.
Mr. Kopp said he is "relatively optimistic" for stocks in coming months.
Charlie Larson - a portfolio manager who co-manages the TCW $140 million diversified small-cap growth fund with Doug Foreman - said the TCW fund focuses on companies with above-average growth rates with capitalizations around $500 million.
"One reason we have done so well" is that if a company shows strong growth over a period of time with continued earnings surprises, "we will stay with it even if it crosses the $1 billion capitalization threshold. The beauty of owning small companies is that you benefit from their growth," he said.
"There are companies in the portfolio for a long time that we haven't sold, simply because they have gotten larger."
Major holdings in the TCW portfolio include America Online, Broderbund Inc., Corporate Express Inc. and the Gartner Group.
The portfolio averages between 100 and 120 companies.
The small-cap discipline, said Mr. Larson, "tends to do better in up markets," and he expects continued favorable conditions for stocks in coming months.
"We look for lower rates, low inflation and that makes us optimistic," he said.
Mary Lisanti, managing director and portfolio manager for Bankers Trust's small-capitalization equity fund, said the fund invests in companies with capitalizations of less than $1 billion with an average capitalization of about $500 million.
Bankers Trust follows a disciplined approach and does its own fundamental research, looking for themes in the market influenced by social, economic and political trends.
"We try to capture change and identify major trends that will last and identify companies that will benefit from that change," she said.
"We don't think in terms of sectors but of themes, which helps us capture major turning points in the market."
She said the fund started pulling back from technology stocks in August, before the sector was rocked by increased volatility, and moved more money into consumer stocks.
Stocks that performed well include Idex Labs Inc., Microchip Technology Inc. and Affiliated Computer Services Inc.
Ms. Lisanti said she expects stocks to continue to do well in coming months, but cautions there may be some anxious moments for market watchers.
"Stocks in general should do fine. With all the budget crisis in Washington, the market doesn't like uncertainty. We expect a budget reconciliation bill by mid-December, but if it drags on beyond that it could be negative for the market," she said.
"Overall we are constructive on the market, we don't see any major negatives. We expect to see continued low interest rates and low inflation with continued corporate restructurings."
The Robertson Stephens Small/Mid Cap Growth portfolio also started reducing its exposure to technology earlier this year, yet still maintains nearly 25% of the portfolio in technology stocks, according to Dave Evans, portfolio manager.
"We are essentially emerging growth investors, we look at companies with 25% to 30% annual rates of growth. We are oriented toward buying and investing in management," said Mr. Evans.
The portfolio normally consists of about 70 stocks with market caps of between $70 million and $700 million.
Mr. Evans said 10 companies represent between 20% to 25% of the portfolio, which is centered on three sectors: technology, health care and service companies.
Names that have done well for the Robertson Stephens portfolio include Regal Cinemas Co., Netcom, Psycor Co. and PMT Services Inc.
"We continue to be excited about the universe that we invest in given the economic backdrop we are facing of low inflation, modest inflation. We expect this to continue for a while, which is good for stocks," he said.
Larry Coats, principal at Oak Value Capital Management, Durham, N.C., which finished fourth overall among PIPER managed equity accounts for the third quarter with 21.17%, said the firm seeks "good businesses with good management at attractive prices" in the tradition of master investor Warren Buffett.
"It sounds simple, but the challenge is in the discipline," said Mr. Coats.
The $240 million Oak Value portfolio is almost equally divided among small-cap stocks with capitalizations of $1 billion or less, midcap stocks with capitalizations of $1 billion to $5 billion and large-cap stocks of $5 billion and higher.
He said Oak Value holds about 20 to 30 stocks in the portfolio, and representatives of the firm annually pay on-site visits with the managements of more than 100 companies.
"If you can't understand it you can't value it, and if we don't understand what these companies are about then we don't allocate client capital to it," he said.
Not surprisingly Berkshire Hathaway is among Oak Value's major holdings. Other stocks include Coca-Cola Co. and Avon Products Inc.