Double your money, double your fun.
Driven by extraordinary returns from technology stocks, particularly in the fourth quarter, small-cap and midcap growth managers dominated equity rankings in Pensions & Investments' Performance Evaluation Report last year, turning in triple-digit performance. There wasn't a value-stock manager in sight.
Technology-stock manager Apodaca Investment Group, San Francisco, topped the rankings among managed equity accounts. Its small-cap growth stock strategy returned 105.4% in the fourth quarter and 199.4% for the year. (A long/short version of this strategy truly shot the lights out, returning 225.5% for the quarter and 477.4% for the year.) In comparison, the Nasdaq Composite index returned 48.2% and 85.6% in the same periods, respectively.
Small player, big returns
With only $145 million in assets under management, Apodaca is still a small player. But the manager saw bets made over the past three years pay off big time in 1999.
Its best performers include JDS Uniphase Corp., a maker of active and passive components for fiber optic networks, which soared more than 830% last year. The manager has held the stock for five years. Similarly, PMC-Sierra Inc., which returned 408% last year, has been in Apodaca's portfolio for more than three years, said Jerry Apodaca, chief investment officer.
"Wall Street discovered that the names we owned all through '97 and all through '98 . . . were dominating. The upside was phenomenal," Mr. Apodaca said.
Other winners included: AudioCodes Ltd., Broadcom Corp., Digital Island Inc., Inktomi Corp., ION Networks Inc., Mercury Interactive Corp. and RealNetworks Inc.
Being patient also paid off for Los Angeles-based TCW Asset Management Co.'s small-cap growth equity strategy, which returned 84.8% in the fourth quarter for its composite and 86.3% for its pooled fund. While TCW's strategy was relatively flat in the second and third quarters, held back by market concerns over rising interest rates, it came roaring back in the last quarter, said Managing Director Chris Ainley.
Among the tech stocks that did well for the manager: Citrix Systems Inc., Exodus Communications Inc., Siebel Systems Inc. and VeriSign Inc.
Meanwhile, TCW took profits from some of its largest and longest-held holdings, including Yahoo! Inc. and Outdoor Systems Inc., to buy up-and-coming tech stocks, including About.com Inc., GoTo.com Inc. and Citadel Communications Corp.
The manager, with about $5 billion in institutional small-cap assets, also bought stock in health-care companies Alkermes Inc. and ImClone Systems Inc.
Technology and biotech stocks also paid off for R S Investment Management, San Francisco.
Chairman and Chief Executive Officer Randy Hecht said the focus on "new economy" firms has been aided by its close access to Silicon Valley. Formerly owned by high-tech specialist bank Robertson Stephens, R S often participates in initial public offerings.
Strong emerging growth
The manager's emerging growth composite shot up 74.4% in the quarter and 180.6% for the year. Among the biggest contributors were Network Solutions Inc. and Knight/Trimark Group Inc., IPOs in 1997 and 1998, respectively.
Mr. Hecht emphasized the portfolio was well-diversified, with nearly 200 names and with no one stock exceeding 5% of assets. Taking profits from Internet stocks [email protected], America Online Inc., and Yahoo as they grew, the manager acquired smaller names.
In contrast, Daedalus Capital LLC, St. Louis, had superior short- and long-term returns from highly concentrated portfolios ranging between 10 and 25 stocks.
Chief Investment Officer Stephen Coleman said he likes to buy "paradigm shifters," although he insists companies have real sales and earnings.
In the fourth quarter, technology stocks drove the firm's 93.1% composite return.
Last year, the manager made money on Sony Corp., Nortel Networks Corp. and Nokia AB Oyj. Software stocks, such as Adobe Systems Inc., Novell Inc. and Great Plains Software Inc. also have contributed. Mr. Coleman also likes broadband stocks, such as Qualcomm Inc. and Corning Inc. Going back in time, however, Walt Disney Co. was his big winner in 1994 and American Express Co. in 1995.
"We refuse to enter anybody's box," Mr. Coleman said. "We're not value, we're not growth, we're not large cap, we're not midcap."
For Driehaus Capital Management Inc., Chicago, 1999 was the year of midcap stocks. "The midcap sector was really the sweet spot of the market last year," said Meighan Harahan, portfolio manager for the Driehaus Midcap Growth Fund.
Driehaus' composite returns were up 93.1% in the fourth quarter, and 226% for the year. The manager also ranks highly in three- and five-year periods. In comparison, the median manager in the PIPER midcap growth universe returned 41.3% and 55.6% in those periods.
A bottom-up stockpicker, Driehaus did well with Internet-related companies.
Other top-ranked managed account equity managers in the fourth quarter included: Amerindo Investment Adivsors' emerging growth strategy, at 91%; Wall Street Associates' microcap growth equity strategy, 87%; Chapman Capital Management's domestic emerging markets, 78.9%; and Insight Capital Research's aggressive growth and midcap growth portfolios, 78.5% and 77.3%, respectively. The median returns for the overall managed equity universe were 14% for the fourth quarter and 17.8% for the year.
In the commingled-fund universe, the story was much the same, with small-cap and midcap managers dominating.
But one surprising fourth-quarter top performer was Marvin & Palmer Associates, Wilmington, Del., which typically is known as a global and international manager. The firm's $90 million in U.S. large-cap growth stocks form a proxy for the U.S. portion of its global stock portfolio, said David Marvin, chairman and chief executive officer.
In the first half of 1999, positions in financial and retail stocks paid off, including Home Depot Inc., Gap Inc., Wal-Mart Stores Inc., Citigroup Inc., Morgan Stanley Dean Witter & Co. and Lehman Brothers Holdings Inc., he said.
The top five commingled funds for the quarter were: TCW's small-cap growth fund, up 86.3%; Financial Management Advisors' Equity Growth LP, 82.8%; the Driehaus-managed small-cap/midcap growth fund run for Massachusetts Mutual Life, 80.4%; GEM Capital Management's special equity fund, 77%; and Roanoke Partners LP, 58.9%.
The median equity commingled fund measured by PIPER returned 14.9% for the quarter, and for the year, 20.6%.