SEVERAL PIPER NUMBERS WRONG
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July 13, 1998 01:00 AM

SEVERAL PIPER NUMBERS WRONG

Arleen Jacobius
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    We goofed.

    This year, Pensions & Investments began collecting its own data for the Pensions & Investments' Performance Evaluation Report. Because of problems during the data conversion, some portfolios and composites were erroneously omitted or incorrectly listed in the PIPER insert June 15.

    Among those firms affected were four that should have ranked first in some of the style charts published: Johnston Schager Asset Management; Sorema Asset Management; Providence Capital Management Inc.; and State Street Research & Management Co.

    For the 12 months ended March 31, Johnston Schager, Greenwich, Conn., ranked first among international equity portfolios with a return of 41.6%. The median PIPER international equity account for the same time period returned 21.5%, and the Morgan Stanley Capital International Europe Australasia Far East Index, 18.9%.

    Johnston Schager's portfolio also held the No. 2 spot for the five-year period, with 24.5%, compared with the median 15.2% and the EAFE's 12.2%.

    Richard Johnston, principal at the firm, attributed the stellar showing to a heavy concentration in financial stocks and Western European companies. The portfolio managers avoided Japanese companies, he said.

    The strategy stresses growth at a reasonable price, he said, and eliminates currency exposure by investing only in American depository receipts, rather than local shares. The portfolio is very concentrated, holding between 15 and 20 stocks.

    "We have a few eggs in the basket and we watch the basket very closely," he said.

    During the one-year period, Mr. Johnston said that basket held no eggs from Japan, but plenty from Western Europe.

    "For the last 41/2 years, we have been avoiding Japan," said Mr. Johnston. "We buy large, liquid, blue-chip companies which are difficult to find in Asia."

    The only Asian exposure the portfolio had was a tangential one, from Western European companies selling products into Asia, he said. Hong Kong Shanghai Bank also was in the portfolio, but Johnston Schager cut its position in half late last year, he said.

    Mr. Johnston said the firm also concentrated on financial stocks outside of Asia, which he said have been "terrific."

    For the short term, the portfolio probably will be steering clear of emerging market securities.

    "When Asia collapsed, Latin America, Brazil and Mexico were tarnished by the same brush," Mr. Johnston said. "Emerging markets have not recovered yet."

    In the growth managed equity market, the top performer for the five-year period under the revised PIPER listing is Sorema Asset Management of New York, with a 37.73% return. The portfolio tied for second in the five-year rankings for overall managed equity. The median PIPER growth managed equity account returned 21.3%; the Standard & Poor's 500 came in at 22.4%.

    Mark Bronzo, Sorema's senior vice president and managing director, attributed the showing to a simple approach in which portfolio managers generally cherry-pick 20 to 30 equities from a limited number of industry sectors that the firm's analysts believe will be performance leaders during a 12- to 24-month window.

    Sorema selects only those stocks that have a 15% capital appreciation return potential, he explained.

    Sorema looks at the earnings histories of companies over a three- to five-year period with a target for the next 12 to 24 months so they can project a 12-month price target for a stock, Mr. Bronzo said.

    Currently, the concentrated portfolio has 25 stocks featuring large-capitalization names. During the past two years, the portfolio has done well in the health care, telecommunications and bank and finance sectors.

    "There's been an awful lot of money spent on improving voice and data networks," he explained.

    In the fairly broad health care area, Sorema managers have avoided nursing homes and health maintenance organizations, but have been strong on drug companies and firms that produce medical devices like pacemakers.

    While Mr. Bronzo said he is optimistic about the future, he expects to see a slowdown in the market. "Either way the stock market will achieve a nice return of 10% to 12% a year," he predicted. "It's a unique time. The U.S. is a superpower from a military and economic standpoint, and U.S. companies are well placed strategically."

    At the same time, Western Europe is expected to go through a restructuring similar to the one experienced in the United States, Mr. Bronzo said. "U.S. companies could take advantage of the volatility around the world and buy assets cheaper and add to manufacturing bases."

    In the fixed-income arena, Providence Capital, Charlotte, N.C., came in first in the broad market managed fixed-income universe with a one-year return of 23.35% for its U.S. Treasury active fixed-income portfolio. The one-year median was 11.5%; the Salomon Broad Bond Index returned 12%. The same portfolio ranked fourth in that universe for the five years ended March 31, reporting 10.4%. The median PIPER broad market managed fixed-income account returned 7.2%, outperforming the index's 7%.

    The Providence portfolio also did well in the overall managed fixed-income universe, returning 23.4% for the year, ranking fifth.

    Providence focuses the portfolio entirely on 30-year coupon U.S. Treasury bonds, said Robert L. Pharr, the firm's president and chief investment officer.

    "We try to remove from client portfolios all the myriad of risk in the fixed-income market like credit quality changes and sinking fund provisions that might hinder performance," Mr. Pharr said.

    He added Providence tries to anticipate what direction interest rates are going and position clients to take best advantage of those interest rates.

    "It's a key factor in determining fixed-income performance," Mr. Pharr said. "Everything else -- like credit quality of the portfolio -- may add incremental value, but the portfolio will float up and down when interest rates change."

    That is why Providence's strategy is to buy long-duration U.S. Treasury bonds when interest rates are likely to decline, so the portfolio can outperform when interest rates fall. When interest rates are likely to rise, Mr. Pharr said, Providence prefers to go with short-term securities.

    State Street Research, Boston, ranked No. 1 with its intermediate duration managed fixed-income portfolio, with 11.7% for the year. The median for the 12-month period was 10.1% which lagged the Salomon Broad index. While State Street's numbers were published correctly in the June 15 issue, its ranking was incorrect.

    Mike Gardner, senior vice president and portfolio manager for State Street Research, called the winning approach "fairly boring."

    "Five basis points a month in outperformance is what we try to deliver," Mr. Gardner said.

    The strategy emphasizes yield on the short end, manages duration in very modest doses, and takes a middle-of-the-road yield curve position that is neither too modest nor aggressive, he said.

    What helped the portfolio is that over the year, interest rates fell at a time when 5% to 6% of the $3 billion portfolio was in long bonds, which held up well.

    At the same time, the corporate portion of the portfolio was overweight in the asset-backed mortgage market and the commercial mortgage market, said Dean Poritsky, vice president and portfolio manager for the firm.

    State Street Research buys only high-rated commercial mortgage debt. "We pay attention to the credit, the structure and the collateral," said Mr. Poritsky. "At the end of the day, we feel they are very attractive."

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