International equity managers who ranked in the first quartile of the Pensions & Investments Performance Evaluation Report outperformed the MSCI EAFE Index in both the quarter and 12 months ended Sept. 30, generally by underweighting Asia and overweighting Europe.
According to the PIPER data, the first-quartile break among international equity manager accounts was 3.4% in the quarter, and 27% for the 12 months, while the Morgan Stanley Capital International Europe Australasia Far East Index slid 0.6% in the quarter, and rose 12.5% for the year. The median international equity account also topped the indexes, returning 1.6% and 19.6%.
Johnston Schager Asset Management Corp., Greenwich, Conn., swept the international equity charts, taking top ranking for the quarter, one- and three-year periods. It returned 12%, 51.5% and 25.5% respectively. (All returns for periods of more than one year are compound annualized.)
It also ranked second in the PIPER global equity quarter and three-year rankings, returning 12.9% for the quarter and 27.8% for three years.
Richard Johnston, president of the firm, which has $200 million in assets under management, said the strong performance in the international equity account came from avoiding Japanese stocks and concentrating on 15 carefully chosen stocks.
"We use a strategy of growth at a reasonable price, selecting our holdings one by one, with a certain amount of country and sector rotation. In the last three years, 40% of the portfolios have been invested in financial stocks around the world, while the rest of the holdings have been eclectic," he said.
LM Ericsson, the Swedish telecommunications company, has been his largest and most lucrative holding. Other top performers are ABB ASEA Brown Boveri Ltd., the Swiss industrial conglomerate; ABN Amro Bank, the Dutch banking conglomerate; and Banco Santander, Spain's largest commercial bank.
"We research the companies and get to know them well before we buy. When the ones we like get overly depressed, we get interested in owning them," Mr. Johnston said. The same approach is used toward country selection.
When stocks slide in certain regions, Mr. Johnston is out buying. He currently is overweighted in Europe, excluding France, and also has some big bets in South Africa and Mexico. Because of the recent turmoil in Asian markets, he expects to uncover new opportunities in Southeast Asia, but he still intends to steer clear of Korean and Japanese stocks.
Ranked second for international equities for the year is INVESCO Global Asset Management's International Equity account, with a return of 49.1%.
Eric Granade, a lead portfolio manager on the account, said performance was driven by stock selection that was underweighted in Japanese stocks and tilted toward European stocks, excluding the United Kingdom, France and Germany. There was also a slight exposure to smaller Asian markets.
"We focus on large, well-established companies based outside the United States, but are broadly diversified by geography and industry," Mr. Granade said. INVESCO, he added, uses a value-oriented bottom-up investment process. "We rely on our global capabilities from Tokyo, London, Hong Kong and use quantitative techniques to help control volatility."
For the quarter, Marvin & Palmer Associates, Wilmington, Del., ranked second in international equity, returning 8.5%. David Marvin, chairman, said the good returns came from underweighting Asia and focusing instead on Europe. He also hedged most European currencies, which declined.
His holdings in the quarter were heavily concentrated in European exporters, pharmaceuticals, financial and telecommunications companies. He reduced his telecommunications exposure at the end of the quarter, but continues to own stakes in financial and pharmaceutical issues in Europe.
While he has been avoiding Japan in general, Mr. Marvin said he has done well with certain exporting stocks such as Canon Inc., Sankyo Co. Ltd. and Matsushita Electric Industrial Co. Ltd.
He has been shifting his strategy recently in response to the turbulence in Asian markets.
"We got out of Hong Kong two months ago. Now, to lower risk, we are concentrating on large-cap, high-quality stocks particularly in Europe. Previously we just had a sprinkling," he said.
PIPER global equity managers who ranked in the first quartile handily outperformed the MSCI World index benchmark for both the quarter and the year. The first quartile break was 6% for the quarter, compared with a PIPER median of 4.3% and the World Index's 2.9% return. For the year, the first-quartile break was 32.5%, the median was 27.3% and the index returned 24.6%.
Polaris Capital Management Inc., Boston, took first place in the quarter, one-, three- and five-year global equity rankings, returning 15.1%, 57.8%, 33.3% and 26.4%, respectively. Bernard Horn, president, said he has been using a value-oriented strategy to identify the best values around the world.
"We search for companies selling at the lowest prices with the best revenue streams," he said. Overweighting in Europe was the key to the strong results, he said. But two Taiwan semiconductor companies -- Taiwan Semiconductor Manufacturing Corp. and United Microelectronics -- were purchased cheaply and sold at a profit in July, which helped performance. So did an investment in the Spanish utility company Union Electrica Fenosa S.A. Other stocks in the portfolio that surged during the year are Lukoil Russia's largest oil company and two U.S. semiconductor equipment makers, Teradyne Inc. and Asyst Technologies Inc.
As he travels around the globe scoping out good buys, Mr. Horn has watched the competitive advantage that once belonged to the U.S. shift toward Europe. The trend is influencing his picks. Another influence is the correction in Asian stocks, which has brought global investors a great opportunity.
Managers in the first quartile of PIPER European equity portfolios just about tied the FTA Europe Index for the quarter, and edged it out for the year. The first-quartile break was 8.3% in the quarter and 36.9% for the 12 months, compared with the index's respective gains of 8.4% in the quarter and 36.3% for the year. The median European equity manager, in comparison, returned 7% and 33.4%.
Baring Asset Management, London, ranked tops for both periods in that category, with 12.5% and 41.5%.
In addition to careful stock selection, Baring measures its portfolios for risk every week, said Mark Pignatelli, head of Baring's European equity team. In the past two years, Baring began looking at its performance in terms of risk, Mr. Pignatelli said.
The portfolio used three major themes for stock selection: the trend toward savings and mutual funds, which ae just starting to take off in Europe; investments in "bricks and mortar," such as construction and property development companies; and technology companies.
"European fund managers are just starting to hire analysts on the sell side, as the technology sector thrives," Mr. Pignatelli said. Some of the companies already benefiting from the trend are SAP-Systeme Anwendung Produkte AG, a German networking maker, and Lernout Hausbie, which makes voice-recognition technology for computers, he said.