The median equity manager reported double-digit returns in both the quarter and year ended March 31, but the returns lagged the Standard & Poor's 500 stock index in both periods, according to the latest Pensions & Investments' Performance Evaluation Report.
Returns for median managers of managed accounts were 12.3% for the quarter and 45.5% for the year ended March 31, while the S&P 500 gained 13.9% for the quarter and 48% for the year. Median managers of commingled accounts were fractionally higher than their managed account counterparts, up 12.4% for the quarter, 45.7% for the year.
Those who managed to outperform the index achieved top performances, in general, by building portfolios that were rich in the technology and financial services stocks that boomed in the first quarter.
Mt. Auburn Management, Boston, sizzled, with its midcap growth portfolios generating a 120.1% return in the year and 35.51% for the quarter, placing it first in PIPER's overall equity managed accounts for both periods.
Alan Dworsky, principal at the firm, attributed the superb showing to the firm's unusual strategy of creating portfolios with only a few stocks that are power house companies.
"Eight of the nine stocks in our portfolio rose over 25% in the quarter. They were mainly information age stocks," he said. "The top performers for us were Dell Computer Corp., up 61% in the quarter; America Online Inc., up 51%; WorldCom Inc., up 42%."
The worst holding in the period was Cendant Corp., which was also one of their smallest holdings. It rose 14% in the quarter.
Mt. Auburn is a growth manager that looks for companies that will "innovate and dominate," Mr. Dworsky said. Health-care companies and specialty retailers have been main holdings in the portfolio in the past, but the firm has lightened up on those recently to concentrate on communications services and technology companies.
Mr. Dworsky is confident the kinds of market-leader companies he buys will continue to outperform, even if the market falters and stocks trade sideways for a time.
While most of the top-ranked portfolios used growth strategies, one big exception was Donald Smith & Co. Inc., Paramus, N.J. The firm's nontaxable equity portfolios placed second in the PIPER managed accounts for the quarter ended March 31, up 20.57%, by focusing on deep value stocks. Donald Smith, principal, pooh-poohed the complaints made by many managers that it has become difficult to find value stocks.
"We keep finding them by looking for low price-to-book or deep value stocks," Mr. Smith said.
Auto stocks, especially Ford Motor Co. Inc. and General Motors Corp. have been big drivers in the portfolio. Industrial stocks such as Inland Steel Industries Inc. and Alumax Inc. also have done well, largely because they are in the process of being acquired. Many of the stocks Mr. Smith finds become takeover targets because they sell at a fraction of their replacement costs, he said.
Other stocks that helped boost returns include Northeast Utilities, which has risen to $16 a share from $8 a share since he bought it nine months ago, and Kmart Corp., which he purchased at $11 and recently has been trading at $18.50 a share.
"We believe many low price-to-book stocks which haven't done well during the bull market are starting to do better," Mr. Smith said.
That's due to a combination of factors: stock buybacks by the companies, earnings turnarounds and companies getting acquired. The stocks in his portfolios, he said, are selling at an average of one times book value, compared with the S&P 500, which is selling at 51/2 to 6 times book value.
Rounding out the top five managed accounts for the quarter: Nicholas-Applegate Capital Management's minicap growth account, up 70.7%; Holt-Smith & Yates Advisors' equity account, up 70.2%; Richard C. Blum & Associates' strategic value account, up 67.5%; and Gabelli Asset Management's equity account, up 66.8%.
Among commingled accounts, Los Angeles-based Transamerica Investment Services Inc.'s Transamerica equity fund was ranked No. 1 by PIPER for both the quarter and the year ended March 31, returning 19.64% in the quarter and 73.63% in the year.
Jeffrey Van Harte, a vice president and senior portfolio manager who has worked on the portfolio, said the firm has been using the same strategy successfully for 10 years.
"We buy great companies and hold them," he said. "A lot of our best ideas are value stocks that become growth stocks. We keep the winners five to six years and kick out the losers after one or two years. If there is an industry we like, we pick the leading company and own it big."
The firm has been bullish on financial services and technology stocks. Charles Schwab & Co. Inc. makes up 3.7% of the portfolio and Transamerica owns 5% of the company. It also likes Franklin Resources Inc. and Merrill Lynch & Co. Inc. in financial services; and Dell, Microsoft Corp., Cisco Systems Inc., Intel Corp. and Applied Materials Inc. in technology. Of those technology companies, each is the leader in its field and commands the highest market share and the largest economies of scale, Mr. Van Harte pointed out.
Another important sector in his portfolio is transaction processors used in health care. First Data Corp. and Envoy Corp. are favorite holdings in that group.
Longer term, the Transamerica fund returned 32.91% for five years, and 29% for 10 years.
The Associated Regional Bank Fund of Associated Bank N.A., Neenah, Wis., ranked second in the PIPER commingled accounts for the year, returning 72.4%.
Mark Heaselden, portfolio manager, said the portfolio concentrates on smaller banks in Illinois, Wisconsin, Michigan and North Carolina.
"We initially chose them by region in areas where we expected consolidation. We look for high quality banks and have bought a few real winners, because they were taken over," he said.
First of America Bank Corp. was acquired by National City Bank of Indiana, and Wachovia Bank NA bought Central Fidelity Banks Inc. Both deals contributed a lot to the stellar results, Mr. Heaselden said.
The trend of consolidation in the banking industry will continue, he said, particularly among commercial and consumer banks. He looks for banking stocks with improving efficiency and strong noninterest income.
Ranking third in PIPER's commingled accounts for the year ended March 31 was the small-cap growth fund of TCW Group, San Gabriel, Calif., which returned 63.4% in the period.
Douglas Foreman, chief investment officer-domestic equities, said the strategy is to buy fast-growing, highly profitable companies whose earnings prospects are underappreciated by Wall Street. "We look for people who are growing their companies with proprietary products, so their businesses will grow rapidly," he said.
The portfolio managers pick stocks from growth sectors, primarily technology, health-care and service companies. A lot of the companies in the portfolio continue to beat earnings expectations on a consistent basis, he said.
"We expect that to continue. We're not dependent on Asia or macro-economic events. We believe stock prices follow underlying business growth over a reasonable time period," he said.
Favorite stock picks are Saville Systems, Safeskin Corp. and Yahoo Inc.
