Bank and utility portfolios provided managers with the strongest returns in the fourth quarter, while many other equity accounts were affected by the stock market downturn last October, according to the most recent Pensions & Investments Performance Evaluation Report.
The median was 0.4% for all managed equity accounts in the PIPER universe during the fourth quarter, compared with 11.6% for the third quarter, and 29.6% for the year. Commingled equity accounts had a median return of 0.9% for the fourth quarter, compared with 10.3% for the third quarter, and 29.5% for the year. The S&P 500 stock index returned 2.9% for the fourth quarter, and 33.4% for 1997.
The top performer in overall managed equity for the year and the quarter was WRM Equity Management in Briarcliff Manor, N.Y., with a small-cap bank stock portfolio. Bank stocks were boosted in 1997 by some of the strongest merger and acquisition activity in recent years.
"The (banking) consolidations contribute to better earnings," said Warren R. Marcus, president of WRM, which had a return of 71.9% for 1997 for the small-cap bank stock composite. "(Consolidation) creates publicity, more investors become aware and valuation levels increase, and the price-earnings ratio goes up."
One WRM holding, BB&T Corp., was put into the S&P 500 last fall, and the stock rose on that. Another WRM holding, Emerald Isle Bancorp. Inc., announced it was being acquired and Emerald's stock rose on that note.
For the quarter, WRM's bank composite led overall managed equity returns with 20.17%. It had the second highest performance for the three- and five-year periods.
Mr. Marcus has managed a pool of bank stocks for 14 years, accounting for $118 million. WRM invests less than 10% of its portfolio in small regional banks deemed to be likely acquisition candidates.
"We've kept the focus modest in size because by considering the small, we can look at a larger universe of stocks," Mr. Marcus said.
"Bank earnings have been giving 11% to 12% per annum, which is high compared to history," he said. "In 1998, I expect bank earnings of 10% to 11%. Even if banks slow some, it's favorable compared to the past." Only one acquisition has been announced so far, Heritage Financial Services Inc., which is in WRM's portfolio.
The Asian currency crisis was felt by U.S. money managers. Domestic money managers were affected by the Asian crisis indirectly, said Kristin Yates, a managing director of Holt-Smith & Yates Advisors, Madison, Wis. The company manages equity and fixed income, with about $140 million total under management.
"We don't own Asian stocks but we do own a company, AIG, that does business there, and that stock went down because investors feared what the crisis there would do to our economy," Ms. Yates said. American International Group Inc., the New York-based international insurance company, is raising a pool of money to invest in distressed Asian companies.
Holt-Smith & Yates' managed equity composite returned 54% for the year, ranking second highest in the PIPER universe. That same composite also led the growth equity sector.
The firm has shown a willingness to hold onto its purchases. One seven-year holding, Dell Computer Corp., went down 12.7% in the fourth quarter.
"But we don't manage by quarters," said Marilyn Holt-Smith, managing director. "Our stocks were up 60% without cash. We've had no bad stocks and nothing has lost money."
An emphasis on utilities helped Boston-based Trinity Investment Management Corp. return 19.1%, taking second place for overall managed equity performance for the quarter. The firm has $7 billion total under management.
"Utilities have been the ugly duckling of Wall Street," said John Pomeroy, manager of utility portfolios for Trinity.
"Interest rates came down almost 50 basis points alone in the fourth quarter," Mr. Pomeroy said. Trinity's SectorPlex utilities portfolios are about 60% telephone stocks, and have $63.5 million.
Utilities lagged the S&P by 27% until they popped into favor in the fourth quarter, Mr. Pomeroy said.
"Interest rates went down. The electric utilities were down because there was uncertainty about deregulation. But the telephone companies have already been through deregulation and they are expanding. People are recognizing this as a good value," he said.
Banks and utilities paid off for commingled funds, too.
Associated Bank in Chicago, with its Associated Regional Bank Fund, returned 17.3% for the quarter and 74.3% for the year, placing it first for both periods.
A utilities index fund of Barclays Global Investors, San Francisco, followed in the quarter with a 14.5% return. The fund is composed of electric, gas and small telephone companies. Since most of those companies pay dividends to stockholders, the firms are interest-rate sensitive, said Tom Seto, head of Barclays' U.S. equity index investments group.
"These companies benefited from a favorable interest rate environment in the fourth quarter," Mr. Seto said, regarding the drop in interest rates during that period. The Intermediate Cap Utilities Fund A has about $860 million.
Consolidation activity in the financial services industry boosted another Barclays index fund in the overall commingled equity. The Intermediate Cap Value Fund was up 5.83% for the quarter and was the fourth highest overall commingled equity performer for 1997 with a return of 41.5%.
"These companies also benefited from the interest rate in the fourth quarter," Mr. Seto said.
The intermediate value fund, with $4 billion in assets, contains about 230 U.S. companies, with capitalizations larger than $1.2 billion and not in the S&P 500.
Catherine Green, a vice president and portfolio manager at Invista Capital Management Inc., is responsible for the Medium Company Value fund that ranked fourth in overall commingled equity performance in the quarter.
"Our exposure in utilities and financials was the biggest boon, and our underweighting in technology was a help," she said.
The midcap value fund has assets of $964 million. About 23% is invested in financial services, the largest category, and about 9% is in utilities, a segment that increased 23% in the fourth quarter, she said. About 40 U.S. companies are represented, with a market capitalization of between $800 million and $5 billion.
"We were also slightly overweighted in retail, which was up 15% for the quarter," she said. J.C. Penney Co. announced it was buying Eckerd Corp., so that helped the relative price-earnings ratio the market was willing to put on Penney's, which is in the fund, Ms. Green said. Des Moines, Iowa-based Invista is a subsidiary of Principal Financial Group.
Among commingled equity managers, other leaders for the quarter included Associated Bank's equity income fund, with 10.8%, and Pension Portfolio Advisors' equity income fund, 6.3%. Others in the top five for the year were GEM Capital Management's Oak Tree Partners LP, at 63.3%; Transamerica Investment Services' equity fund, 47%; and Associated Bank's common stock fund, 41%.
PIPER data are compiled by RogersCasey & Associates, Darien, Conn. Managers' reported holdings are subject to change prior to publication.