WASHINGTON - Back in the summer when small-capitalization stocks were in the dumps, Philip Tasho, chief executive officer and chief investment officer of RIMCO, was betting they would make a sharp recovery.
With the dollar appreciating relative to currencies of other large developed economies, he reckoned that U.S. conglomerates would have a harder time selling their goods overseas.
And because these corporations produce up to half their earnings from foreign sales, compared with only 10% to 20% for smaller companies, Mr. Tasho believed the earnings of companies that make up the Standard & Poor's 500 Stock Index would slow.
At the same time, as the U.S. economy continues to remain robust, he figured smaller companies, which produce most of their earnings from domestic sales, would have a chance to shine.
Mr. Tasho predicts American companies' profits will increase 7% this year, and slow to about 5% next year. Conversely, he anticipates the S&P 600 index, RIMCO's benchmark for small company stocks, will rise 21% this year, and maintain that in 1998.
"We expect another 10 to 15 percentage point movement upward in small-cap stocks" this year, he said.
Riggs Investment Management Corp. devotes about 20% of its total portfolio (most clients are in balanced accounts) to small-cap stocks. The remainder is split evenly between domestic large-cap stocks and fixed income.
"We'd like to see small caps as part of our core position," he said in an interview.
It's easy to see why.
For the nine months ended Sept. 30, the S&P 600 index was up 29.6%, in a dead heat with the S&P 500. But in the third quarter alone, the S&P 500 returned only 7.5% while the S&P 600 was up 16.2%. Meanwhile, RIMCO's small-cap portfolio was up 23.3% in the third quarter, and up 41.4% for the first nine months of 1997.
In large-cap stocks, RIMCO outperformed the S&P 500 for the quarter - up 10.7% - but slightly underperformed it for the first nine months, with a return of 29.2%.
RIMCO's fixed-income portfolio has been on par with the Lehman Government Corporate Bond Index - 3.6% for the quarter vs. 3.5% for the benchmark, and 6.3% in the first nine months of 1997 vs. 6.4% for the index.
Much of that credit goes to Mr. Tasho, who returned to RIMCO in November 1995, following the departure of the firm's equity management team to Columbia Partners. With Mr. Tasho at the helm, RIMCO is rebuilding. Total assets under management are about $3.1 billion, vs. $2.7 billion in 1995 after the Columbia Partners defections. The firm has landed four new endowments within the past year, and gathered additional money from existing clients.
The firm is growing its business by mining the bank's foreign clients for institutional business, as well as high net-worth clients for wrap accounts. In the past six months, it has received $40 million from overseas, mostly Latin America.
The money management firm recently was approved to participate in a wrap program with The Principal Financial Group, Dallas, as a domestic small-cap manager. Starting in early 1998, RIMCO also will be participate in Fidelity Investments' wrap program as a fee-only adviser for financial planners to sell to retail clients. And RIMCO also has been selected as a large-cap value manager for Dunham & Associates, a San Diego fund of funds.
RIMCO is not counting out growth through acquisitions, "looking for assets that we can enhance with our own products, also new products that could dovetail" the firm's products, Mr. Tasho said.
And finally, the firm is counting on its top-performing Monument family of mutual funds to land defined contribution plan business. Monument Stock Fund (the large-cap fund) recently received a five-star rating from Morningstar, the mutual fund rating agency, for its five-year performance.
Mr. Tasho believes it is important to stick to the firm's value momentum style of investing, and to become niche players. RIMCO searches for companies whose earnings will spike because of corporate restructurings, industry consolidations, strategic acquisitions with a competitor, or the development of new products.
"It's the hottest part of the market. Value is in vogue big time because every one expects it to be an extended economic cycle. The conviction is increasing that we are not near the end of the economic cycle and inflation is under control," he said.
And because that style tends to outperform when the market is falling, RIMCO is poised for a correction.
