Small-cap growth and value managers shared the top spots in Pensions & Investments' Performance Evaluation Report in the second quarter, while small-cap growth managers stole the show for the year with returns of more than 100%.
Returns of large-cap stocks continued to lag those of other equity types, finishing in the bottom half of the pack for the year and quarter ended June 30. But for the five- and 10-year periods, large-cap equity managers still have outperformed managers of smaller capitalization stocks.
The three top-performing managed equity portfolios for the quarter were all from small-cap managers: State Street Research & Management Co., Boston, 22.3%; Capital Consultants LLC, Portland, Ore., 14.2%; and Ariel Capital Management Inc., Chicago, 13.4%. The median return was -2.2% for the quarter.
While the Standard & Poor's 500 index finished the quarter down 2.7% and the Nasdaq dropped 13%, Capital Consultants' Chief Investment Officer Roger Thomas had plenty of reasons to be happy with his firm's performance for the quarter.
His growth-at-a-reasonable-price strategy coupled with a concentrated portfolio paid off in a volatile market. And although he uses a bottom-up strategy, the most popular sectors still are represented by the 25 stocks in the small-cap portfolio.
"You had to be in the world of technology (this quarter). And realistically at the broad level we are about half invested in technology companies," Mr. Thomas said.
His GARP strategies have helped him stay away from dot-coms, more so than his growth counterparts, he said.
Other small-cap equity managers among the top 10 managed equity accounts for the year agreed technology that supports the web, not the dot-com companies themselves, make for winning investments.
The 10 top-ranked managed equity accounts for the year ended June 30 all were invested in small-cap and midcap strategies. Topping the list were: Apodaca Investment Group, San Francisco, 242.2% in its long/short hedge fund portfolio; Driehaus Capital Management Inc., Chicago, 236% in its small-cap growth portfolio; and Kopp Investment Advisors, Edina, Minn., 188.1% emerging growth equity account; Apodaca, 167.3% in a small-cap growth equity strategy; and Duncan-Hurst Capital Management Inc., San Diego, 143.9% in a microcap growth equity portfolio. The median return for the year was 3.4%.
The Apodaca portfolio that topped the one- and three-year charts is strictly a small-cap tech stock fund, said Jerry Apodaca, managing partner.
"We find the companies that in the next two or three years will be the emerging companies in technology," he said of his hedge fund's long strategy.
While the S&P 500's one-year return was 7.2% and the Nasdaq's return 29.1%, Apodaca's return of 242.4% seems too good to be true. The fund's 43.2% drop in the second quarter, in contrast, put it at the bottom of those rankings; but its average annual 91.3% return for the three years ended June 30 put it at the top of that list.
Most of the companies in the Apodaca hedge fund are technology companies such as JDS Uniphase Corp. and PMC-Sierra Inc., which have seen unprecedented markups in share price. Most of the hot technology companies are in the fiber optics, wireless and DSL businesses.
On the short side, his firm shorts stocks that are characterized as dot-coms and companies that have weak business plans or are in troubled industries.
For example "the e-tailers, trying to sell you something online . . . those business models were never going to work," Mr. Apodaca said.
The same general investment strategy (minus the long/short investing) is applied to the small-cap equity growth portfolio, which ranked fourth among the managed account one-year returns.
Portfolio managers at Driehaus also look for a few up-and-coming technology stocks, and have found some winners.
The Driehaus small-cap recovery growth portfolio, which ranked second in PIPER with a return of 236%, contains stocks that are 30% or more off their normal highs, said Andrew Rich, portfolio manager.
Since small-cap growth came back in favor in October 1998, Mr. Rich has bought lots of companies that are focused on telecommunications infrastructure.
His favorite find so far has been VEECO Instruments Inc., a disk drive company whose stock took off after it acquired a fiber optics company.
In his search for aggressive growth companies, Mr. Rich expects the next sector he will put in his portfolio to be distributed power generation companies. He declined to give specific company names, but said these companies will feed off of the needs of web companies in supplying a stable supply of electricity to web-hosting companies.
Kopp Investment Advisors targets the same industries and company sizes as Driehaus and Apodaca, which paid off with a one-year return of 188.1%, said Steve Crowley, senior portfolio manager.
He has invested in companies such as JDS Uniphase and SDL Inc., which take advantage of telecommunications technology.
"We continue to see a lot of runway for these stocks," Mr. Crowley said, pointing out that JDS has returned more than 1,000% since 1995. Thirty-four stocks Kopp bought this year have been up more than 100% year-to-date.
Mr. Crowley expects that he and others will continue to invest in the "communication pipes" needed to make dot-com businesses work.
The bets that many real estate investment trust equity managers took at the end of last year also paid off in the second quarter, with those firms posting double-digit returns and in some cases beating their tech-stock hungry colleagues.
Among managed equity accounts, five REIT managers were among the top 10 for the quarter, although no REIT managers appeared among the top 10 for the year.
Cohen & Steers Capital Management Inc. ranked fourth with a return of 13.2% for the quarter.
"REITs have been behaving very well this year for the first time in a long while," said Bob Steers, chairman of the New York-based firm.
The boost in REIT equity mainly has been driven by a spike in rents of office and residential properties, Mr. Steers said.
Another main driver has been a drop in REIT share prices, which has encouraged investors to buy REIT shares. The prices have been at all-time lows, even lower than the real estate depression in 1990.
Other REIT managers that help to round off the top 10 managed equity performers for the quarter were: Dalton, Greiner, Hartman, Maher & Co. and INVESCO Realty Advisors, both of New York, with 12.9% each; Brinson Partners, Chicago, 12.2%; and John McStay Investment Counsel LP, Dallas, 11.8%.
On the commingled side, REIT and small-cap managers also performed well for the quarter.
The top managers and their investment portfolios were: Well- ington Trust Co., Boston, energy stock portfolio, 15.4%; Delaware Investment Advisers, Philadelphia, REITs, 13.6%; INVESCO Realty, REITs, 13.1%; Grantham, Mayo, Van Otterloo & Co. LLC, Boston, REITs, 12.3%; and Oppenheimer Capital, New York, small-cap value equity, 9.2%. The median for the quarter was -2.8%.
Damon Andres, portfolio co-manager at Delaware, believes most people overlook the connection between technology and real estate investment trusts.
While REITs in his portfolio may seem to be an "old economy" play, they really can be connected with "new economy" growth, he said.
The main holding in the portfolio is Spieker Properties, which largely has property in Silicon Valley, where real estate demand from Internet companies is very strong.
"While all of us can stop shopping on the net, the reality of real estate is that you can't (stop shopping)," he said. Companies like Amazon.com Inc. and others will always need office space, he added.
Commingled managers also had technology to thank for prosperous returns.
The top managers for commingled funds for the year were: Massachusetts Mutual Life, Springfield, Mass., small-/midcap growth, 120.8%; Provident Investment Counsel Inc., Pasadena, Calif., midcap growth, 92% and for small-cap growth, 85.7%; Copper Mountain Trust Corp., emerging growth, 83.3%; and Roanoke Asset Management, New York, small-cap growth, 82.3%.