The second quarter finally brought relief -- in a big way -- to value and smaller-capitalization equity investors in Pensions & Investments' Performance Evaluation Report.
The market broadened its narrow focus on the large-cap growth stocks it had rewarded for so long. April in particular was a "revenge of the nerds," as value and small-cap stocks in "forgotten industries (paper, metals, chemicals and energy) became popular, 'even cool,' for a time," according to Callan Associates Inc.'s analysis of second-quarter returns.
The market's broadening was reflected in an abrupt flip-flop among the top 10 managers in both the managed account and commingled fund PIPER equity rankings. The large-cap growth managers that dominated the quarterly rankings for so long were replaced by managers with wider style mandates.
Among managed account firms, which had a median return of 10.7% overall in the quarter ended June 30, the small-cap value asset class had the best return -- a median 17.6%. Large-cap growth managers fared worst, with a median return of 5%.
All of the top 10 managers in the overall managed account equity universe easily beat the 7% return of the Standard & Poor's 500 stock index.
First in the managed account universe was Griffon Capital Management's Dynamic Equity Investment strategy, with a 42.6% return for the quarter. Quaker Capital Management's Opportunistic Value Equity strategy followed with 42.3%. Rounding out the top five were: Ardsley Partner's Equity Fund II, 37.7%; ICM Asset Management's Small to Mid Cap Value strategy, 34.8%; and Fuller & Thaler Asset Management's Small-cap Value, 33.6%.
Robert J. Murphy, president of Cyber Investment Management Inc., which subadvises Griffon Capital's $17.2 million Dynamic Equity portfolio, uses a momentum approach that is quantitative, technical and emphasizes fundamentals without a value bias. Both Griffon and Cyber are in Ann Arbor, Mich.
Mr. Murphy's model identifies stocks of companies that are "leading the market, with the best fundamentals. I look for not the strongest companies, but rather, the strongest stocks."
The leaders in the second quarter were technology and Internet stocks, particularly in April, when Mr. Murphy said he was very active. He was up 25% in April alone.
But the market was so hot, with some of his stock picks -- RealNetworks Inc., CMG Information Services Inc. and [email protected] Inc. -- more than doubling in a matter of days, that Mr. Murphy said it became obvious the market for tech stocks couldn't sustain itself and he began to liquidate his positions. Some of his star performers on the tech side were GemStar International Group Ltd., QUALCOMM Inc. and Sun Microsystems Inc.
He also was rewarded this year when he lifted his own strict market capitalization requirement for small-cap stocks and let himself move into some midcap issues, his personal bias.
"Small-cap is just too illiquid for institutions. There are much better valuations in emerging midcap stocks," he said.
Hedge fund manager Ardsley Partners in Greenwich, Conn., uses an opportunistic style and tends to have a midcap growth bias, which was rewarded when "the character of the market changed at the end of March, beginning of April, and everything broadened out," said Kevin McCormack, partner.
In the commingled universe, small-cap value fund managers returned a median 17.5% for the second quarter, making it the best performing asset class; followed by small-cap growth managers, 13.9%. Large-cap growth commingled fund managers returned a median 5%.
All 10 top overall commingled equity managers beat the S&P 500. The overall median return was 8.9%.
The best performing fund for the quarter was GEM Capital Management Inc.'s Special Equity Fund, 37.8%; followed by Roanoke Asset Management's Roanoke Partners LP, 32.1%. Funds managed by The Boston Co. Asset Management Inc., Boston, finished out the top five: the Select Value Equity Management Fund, 31.3%; Small Cap Value Equity Fund, 30.3%; and Premier Value Equity Fund, 28.7%
Concentration was the name of the game for the $240 million GEM fund. Gerald B. Unterman, president and chief investment officer of GEM, New York, runs a concentrated portfolio of 10 to 25 stocks.
GEM Special Equities did well in the quarter thanks to investments such as NEXTEL Communications and Winstar Communications Inc., the largest holdings in the portfolio, he said. He also likes Cendant Corp.
The market's switch in the second quarter to small-cap and value strategies was not reflected in the one-year returns, where the leaders are mixed market cap and style managers. Managed account managers, with a 14.4% median return overall for the 12 months, trailed the 22.8% return of the S&P 500. Large-cap growth managers, while still missing the benchmark, had the best median return for the year, 22.6%. Overall, growth managers had a median return of 19.3% for the year vs. 8.7% for value managers.
Leading the overall managed accounts for the year was Amerindo Investment Advisors' Emerging Growth Strategy at 132.1%; followed by Mt. Auburn Management's Concentrated Large Growth strategy, 89%; Driehaus Capital Management's Small Cap Growth Equity Strategy, 88%; TCW Group's Mid-Cap Equities, 87.9%; and Husic Capital Management's Hedge (Long/ Short Equity) strategy, 87.7%.
Alan J. Dworsky, principal at Mt. Auburn Management, Boston, who manages the portfolio, holds eight to 10 stocks with market caps larger than $10 billion. The most important stocks in the growth manager's portfolio were Dell Computer Corp. and America Online Inc. EMC Corp., which he has held for two years, was another big winner in the year, as it capitalized on the market's focus on information technology.
The strategy also ranked second in the three-year period with a compound annualized 65.4%.
Among commingled fund managers, the story was the same. The median one-year return for overall commingled managers, 16.7%, trailed the S&P 500.
The best performing commingled fund for the 12 months was Massachusetts Mutual Life Insurance Co. Inc.'s Small/Mid Cap Growth Fund at 86.7%, followed by Marvin & Palmer Associates' Large-cap Growth Fund, 63%; Roanoke Asset Management's Roanoke Partner's LP Fund, 56%; Hellman, Jordan Management Co. Inc.'s Hellman Jordan Fund LP, 54.9%; and Wachovia Investment Management Co.'s Diversified Capital Growth Fund, 45.8%.
Large-cap focus a boon
Marvin & Palmer, Wilmington, Del., also snagged second place in the three-year period with 41.7% for the $33 million fund. Stephen D. Marvin is one of three portfolio managers on the fund, which uses a large-cap, growth investment focus and benefited from the market's preoccupation with large-cap stocks in the past three years.
The concentration in large-cap stocks is reflected in PIPER's three-year numbers. Managed account managers had a median return overall of 22.3%, behind the S&P 500's 29.1%. (All returns for periods of more than one year are annualized.) Large-cap managers had a 25.7% median return for the three years ended June 30. The median return for all commingled fund managers for the three years was 23.2%.
The leader in the managed account universe for the three years was the enhanced equity strategy at Payden & Rygel, Los Angeles, 99.6%; followed by Mt. Auburn Management's concentrated large growth and Essex Investment Management's Growth Equity, 61.6%; Campbell, Cowperthwait & Co.'s Large Cap Growth Equity strategy, 52%; and Trainer, Wortham & Co.'s Large Cap Growth strategy, 47.4%.
First for the three years among commingled managers was Transamerica Investment Services' Equity Fund, 42%. Marvin & Palmer's fund was second, followed by Alliance Capital Management's Large Cap Growth Equity CM Fund, 38.1%; Chase Bank of Texas' Equity Growth Group Fund, 35.1%; and the Hellman Jordan Fund, 34.5%.
The Transamerica fund, run by Jeff Van Harte, vice president and senior portfolio manager, typically holds 25 to 30 stocks.