The surging U.S. stock market again led to strong returns for investment managers in the year ended June 30, but most managers did not outperform large-capitalization stock indexes.
Even though the small-cap Russell 2000's return was less than half of the S&P 500's, small-cap managers were able to take half of the top 10 slots in the rankings of U.S. equity separate account managers in the PIPER database.
In the Pensions & Investments' Performance Evaluation Report, the median U.S. equity manager posted a very respectable 28.6% return for the year ended June 30.
But the Standard & Poor's 500 Stock Index returned an even stronger 34.7%, while the Russell 2000 returned just 16.3%.
During the second quarter, emerging growth and small-cap equity manager rebounded to take the top seven slots among all PIPER U.S. equity managers.
The median manager in the quarter was able to match the Russell 2000, but couldn't keep pace with the S&P 500. The median PIPER manager and the Russell 2000 returned 16.2%, while the S&P 500 returned 17.5%.
For the one-year period, the top performing separate account manager was Shaker Investments, Shaker Heights, Ohio, which reported a return of 52.5% for its growth/value-fixed fee composite.
Shaker also was the top performer for the three-year period, with an annualized return of 48.4%. For five years, it ranked third, with an annualized return of 36.9%.
Meanwhile, the S&P 500 returned 28.9% annualized for three years, and 19.8% annualized over five years, while the Russell 2000 returned 20.1% and 17.9% for the same respective periods.
David Webb, a partner at Shaker, said the firm's portfolio managers look for companies that are in a dominant position within a growing industry.
They look for situations where the company is so large within that industry, that it can essentially control its own growth rate, he said.
In addition, Shaker's managers examine the company to try to identify the business risks the company faces, making sure there are as little as possible. They look for situations where the company may rely heavily on a few customers, he said.
"We look for companies that have committed no sins," Mr. Webb said.
Within that context, they want to buy companies that are selling at a price-earnings ratio that is lower than their expected growth rate.
So Shaker managers aren't afraid to own stocks with relatively high p/e ratios, as long as the growth is there.
"A company that has a p/e of 30 can be an outstanding investment, and really cheap, if the sustainable growth is 50%," Mr. Webb said. Of course, the trick is finding companies with high sustainable growth, he said.
Some of the stocks that contributed to Shaker's returns were financial companies like Franklin Resources Inc., Travelers Group Inc. and McDonald & Co. Investments Inc., he said.
Semiconductor companies also performed well during the one-year period. He cited names such as Altera Corp., Xilinx Inc. and Linear Technology Corp.
Another company that Mr. Webb cited is Qiagen N.V., which at the time of the interview carried a p/e of 112 based on trailing 12-month earnings, and a p/e of 71 based on future expected earnings.
He said the company, which makes kits used in DNA research, has "virtually no entrenched competitors."
Metro Networks Inc. is another interesting story, he said. The company provides traffic reports for radio stations, in what he said was "a virtually unassailable competitive position."
Moreover, Metro Networks is working to expand more into news, weather and sports, he said.
Shaker had $110 million invested in the style as of Dec. 31.
The equity-growth composite managed by McHugh Associates Inc., Radnor, Pa., ranked second for the one-year period.
Richard Holt, vice president and portfolio manager for McHugh, said managers there seek consistent growth across market caps, but are not momentum style of investors.
McHugh's portfolios are relatively concentrated, generally with about 25 different companies, he said.
"There are going to be areas that we have no exposure to," Mr. Holt said.
Still, its holdings are diverse. They include well-known names such as Intel Corp. and Microsoft Corp., as well as lesser known firms such as Molex Inc., an electronics manufacturer.
Molex, Mr. Holt said, carries the same type of growth characteristics as a company like Coca-Cola Co., but isn't as widely held.
Another favorite is Harley Davidson Inc., which has been "a stellar performer," he said.
The companies in McHugh's portfolios will be weighted equally, because managers don't want an index-like performance profile.
McHugh managed $337 million in the style as of Dec. 31.
First Asset Management, Minneapolis, reported the third best PIPER return for the year ended June 30 - 48.6% for its special equity style.
Forstmann-Leff Associates' midcap emphasis strategy again produced a top 10 performance, finishing fourth among all managers in the one-year period with a return of 47.3%. Forstmann-Leff's midcap strategy also finished in the top 10 rankings for the one-year periods ended March 31 and last Dec. 31.
Forstmann-Leff's mid-cap managers focus on companies with high sustainable growth rates, and that are leaders in their respective industry, according to a written statement from Sarah J.R. Kaye, senior vice president and director of client relations.
Forstmann-Leff managed $80 million in the style as of Dec. 31.
Holt-Smith & Yates Advisors, Madison, Wis., reported a return of 47.2% for its equity composite, placing the fifth among all PIPER separate account managers for the year.
Holt-Smith, like McHugh, builds concentrated portfolios of about 25 companies, seeking to buy companies the firm would like to buy outright.
Holt-Smith & Yates, formerly Holt-Smith & Renk, also makes a repeat performance after finishing in the top 10 last quarter.
The firm uses growth equity screens to select companies that carry p/e ration at or better than the market.
Dell Computer Corp. continues to be a favorite stock of the managers there, although they have taken some profits in Dell, said Marilyn Holt-Smith, managing director.
A company added recently to portfolios is A D C Telecommunications, said Kristin Yates, also a managing director.
Holt-Smith managed $10 million in the style as of Dec. 31.
Farrell-Wako Global Investment Management Inc., New York, reported the sixth-highest ranked separate account composite, 46.4% for its U.S. small-cap alpha strategy.
James Farrell, chairman, said Farrell-Wako managers create unconcentrated portfolios of 60 to 70 stocks, with individual stock positions comprising no more than 2% to 3% of the total portfolio.
Farrell-Wako manager seek diversification in numbers of stocks and by industry sector, Mr. Farrell said. He said the style's benchmark is the Russell 2500, which consists of the bottom 500 stocks in the Russell 1000 and the total Russell 2000.
He said the year ended June 30 was a classic example of what they try to do, not falling as much in down months, but outperforming by a little bit in up months.
The firm doesn't try to "shoot the lights out each and every time period," he said.
Some examples of companies that Farrell-Wako currently owns and that contributed to its PIPER returns are: Adaptec Inc., a technology company; food company Dean Foods Co.; tech company Data General Corp.; and furniture company Ethan Allen Interiors Inc.
Farrell-Wako managed $54 million in the strategy as of Dec. 31.
Ranking seventh was Standish Ayer & Wood, Boston, with an equitized long-short strategy called aggressive growth, which returned 46.4% for the year.
Ralph Tate, managing director for Standish Ayer, said the strategy seeks to create balanced long and short positions within industries, coupled with broad diversification. The long-short positions are then coupled with S&P 500 index futures contracts to create an index-plus return.
Mr. Tate said the strategy is too diversified to identify individual positions that contributed to returns - no position is greater than 2% of the portfolio - but certain sectors have been helpful, including technology, health care and financials.
"It's been a great year for distinctions (among stocks) in the financial area," he said.
Standish Ayer had $66 million in the strategy as of Dec. 31.
Ranking eighth for the one-year period, Neumeier Investment Counsel, Carmel, Calif., reported a return of 46% for its small-cap value strategy.
Peter Neumeier, president, said the firm buys unrecognized, and financially strong companies.
He said the good performance of small cap stocks in the second quarter lifted a number of stocks they owned, including: ICN Pharmaceuticals Inc., National Computer Systems Inc., and Anchor Gaming.
Looking ahead, Mr. Neumeier said he's excited about the prospects of World Fuel Services Corp., which provides fueling and credit services to the airline and marine industries. "If there's a real sleeper in our portfolios, that's got to be it," he said.
Paul Harris Stores Inc., is another company Mr. Neumeier expects to do well.
Mr. Neumeier noted the firm creates concentrated portfolios of about 25 stocks, and has been closed to new investments for two years. Assets stood at about $580 million as of mid August.
Neumeier ranked fourth for the 10 years ended June 30, with an annualized return of 23.1%. In the same period, the S&P 500 returned 14.6% annualized, and the Russell 2000 returned 11.1%. (Neumeier also ranked in the top 10 in the one year ended March 31).
DePrince Race & Zollo Inc., Orlando, Fla., reported the ninth best separate account composite overall for the year, with a 45.4% return for its small-cap value composite.
Kelly Carbone, portfolio manager for DePrince Race, said managers first look for companies with less than $1 billion in market capitalization. They then look at companies with a dividend yield that is both 1% or higher, and is at least 150% of the dividend yield of stocks in the Russell 2000 index, Ms. Carbone said.
They use a valuation model to look for stocks that are trading at the low end of their valuation range.
Portfolios have consistently yielded over 3% from dividends since DePrince Race & Zollo began the small cap strategy two years ago, she said.
Some stocks that have performed well for DePrince Race include: John Alden Financial Corp., a health maintenance organization; Tasty Baking Co., which makes TastyKake snack foods; and Arvin Industries Inc., an automobile industry company, she said.
Morrison Health Care Inc., a company that resulted from a spinoff, is another company that DePrince Race Zollo managers like. The company offers outsourcing of hospital cafeteria service, but brings in kiosks of fast food brand names like TCBY and Burger King, she said.
Boston Partners Asset Management L.P., Boston, ranked 10th for the year with its small-cap value style, which posted a return of 44.4% in PIPER.
Wayne Archambo, portfolio manager, said the firm uses a small-cap value approach overlaid with a strategy that seeks tangible evidence that things are improving in the business. Boston Partners managed $21 million in the strategy as of Dec. 31.
Meanwhile, the rankings for the second quarter were dominated by emerging growth, small- and midcap growth managers, coming back from a tough first quarter.
The top seven managers and their styles, were: Mount Auburn Management, Boston, with a return of 33.4% for its concentrated midcap growth style; Apodaca Capital Management, San Francisco, with a return of 29.7% for its small-cap equity growth style; Trust Company of the West, Los Angeles, with a return of 27.5% for its small-cap growth equity style; and Constitution Research and Management, Boston, returning 27.3% in emerging growth; Duncan-Hurst Capital Management Inc., San Diego, returning 26.7% in emerging growth; Kopp Investment Advisors, Edina, Minn., returning 26.6% in emerging growth; and Alex. Brown Capital Advisory & Trust Co., Baltimore, returning 26.2%, in emerging growth.
Data are compiled by Rogers Casey & Associates, Darien, Conn.
Manager holdings are subject to change prior to publication.