About 23% of active domestic equity investment managers outperformed the Standard & Poor's 500 stock index in the first quarter, according to a quarterly performance survey of active managers by Callan Associates Inc., San Francisco.
"You can be confident that many of the managers (in that universe) were large-cap growth," said Jim McKee, a quantitative consultant in Callan's Morristown, N.J., office.
The median equity manager was up less than 1%, or 0.82%, for the quarter ended March 31, compared with a 5% return for the S&P 500. Managers in the 10th percentile, meanwhile, returned an average 7.8%.
The one-year period ended March 31 found the median domestic equity manager up 4% -- but the S&P up 18.5%. Only 22% of managers outperformed the S&P for the year.
"Active management has been challenged by cap-weighted indexes. Value has been out of fashion and the last three years have been hard for the small- and midcap manager universe," Mr. McKee said.
The Callan Large Cap Index of the 150 largest U.S.-traded stocks was up 6.4%, compared with a return of 0.39% for the large-cap value style. The Callan Broad Market Index of 2,000 stocks gained 4% for the quarter. The Callan Medium Cap Index was up nearly 2%; it represents the next 350 largest stocks after the Callan Large Cap index. The Callan Small Cap Index, with the bottom 1,500 stocks of the Broad Market index, fell 3.4%.
The managers' median domestic equity return for three years ended March 31 was a compound annual 19.7% vs. 28% for the S&P 500. For five years, the median was an annualized 20.9% vs. 26.3% for the S&P; for 10 years, the median was an annualized 17.6% vs. 19% for the S&P.
The survey contained 2,350 portfolios from an undetermined number of managers.
International managers shine
International equity managers fared better than domestic ones: 67% of international stock firms outperformed the Morgan Stanley Capital International Europe Australasia Far East index for the quarter ended March 31.
The median international equity manager had a return of 1.9%, compared with the MSCI EAFE's 1.4%, in dollar terms, for the quarter ending March 31. Tenth percentile non-U.S. equity managers were up 5.7%.
Japan and the United Kingdom were strong performers in the period. The MSCI Japan index was up 12.2%; Japan comprises 23.1% of the EAFE index. The MSCI UK index gained 4.3% for the period; the UK is 22.3% of the EAFE.
The international returns show that managers are "doing what they're paid to do -- pick the best stocks," said Barry Gillman, president of Farris, Gillman & Associates Inc., a global investment consultant in Fort Lee, N.J.
"Equity managers were underweighted in Japan in 1998 and into 1999, although not as much. The average manager had more assets in Europe," he said, which on its face, he added, was not the best decision. The MSCI Europe Index fell 2.1% during the period.
"The managers got the asset allocation wrong and still beat the index because they made good, active choices," Mr. Gillman said.
In the one-year period ended March 31, the median international equity return was 3.7% vs. 6% for the EAFE. For three years ending March 31, the equity median return was an annualized 11.3% vs. 8.5% for the MSCI EAFE index. For five years, the median was an annualized 10.9% vs. 8.8% for the EAFE. For 10 years, the median was 10.5% vs. 5.7% for the index.
Bond managers do better
Nearly 70% of domestic fixed-income managers outperformed the Lehman Brothers Aggregate Index for the first quarter. The index returned -0.5%, while the median manager's return was -11%, according to the Callan survey. Tenth percentile managers were up 1.1%.
The median manager was up 6.4% for the one-year period ended March 31, vs. 6.5% for the index.
Only the mortgage and high-yield bond sectors had positive returns for the first quarter, as the U.S. bond market continued to move sluggishly, according to the Callan Market Review newsletter, which summarizes quarterly market activity.
The Lehman Brothers Mortgage index was up nearly 1% for the quarter, and the Merrill Lynch High Yield Master index had a 1.1% gain during that quarter.
The largest-ever corporate bond issue -- by AT&T Corp. in March -- didn't prevent the Lehman Brothers Corporate Index from returning a -0.7% for the first quarter.
For both the three- and five-year periods ended March 31, the median domestic bond manager in the survey returned a compound annual 7.7%, compared with 7.8% for the LB Aggregate index.
For 10 years, the median was up an annualized 9.2% compared with 9% for the index.
Foreign bonds hurt
International bond managers were not as successful as their domestic counterparts, with only 41% of managers outperforming the Salomon Non-U.S. Government Bond index during the first quarter of 1999. The median international bond manager returned -4.9% for the quarter; the index returned -4.8%; and 10th percentile managers returned -3.28% in the first quarter.
Bond results were hurt by the euro's 8.1% depreciation against the dollar, according to Callan. The best-performing market in dollar terms was Australia and the worst was Spain.
For the one-year period ended March 31, the median return for international bond managers was 10.4% vs. 11.6% for the Salomon Non-U.S. index.
For the three-year period, the median was a compound annual 5.4% vs. 4.4% for the index. For five years, the median matched the index -- at 6.8%. The 10-year median return for the period ended March 31 was an annualized 10% vs. 8.9% for the index.