Industry experts say the list of absolute value managers has shrunk to two main players: Barrow, Hanley, Mewhinney and Strauss Inc., Dallas; and Sanford C. Bernstein & Co. Inc., New York.
These so-called absolute -- or deep or traditional -- value managers are among the last of their breed, large money management operations with a rigid focus on value stocks with price-earnings ratios below that of the Russell 1000 or Standard & Poor's 500 indexes.
Consultants and others say both Barrow, Hanley and Bernstein are attracting new clients, although officials at both companies wouldn't talk about their client lists.
Other absolute value managers -- UBS Brinson; Oppenheimer Capital; Ark Asset Management Co. Inc.; and the Miller, Anderson, Sherrerd group that is now part of Morgan Stanley Dean Witter & Co. -- are experiencing such difficult organizational or performance problems that they simply aren't serious contenders, consultants say.
Another deep value manager, PPM America Inc., Chicago, has had such a hard time attracting new business that it is "suspending" direct marketing of its value equity products to institutional clients and their consultants, said Russ Swanson, president. The three-person marketing staff, led by Jim White and based in Chicago, will be laid off Oct. 1.
"It's tough to find absolute value managers," said Susan N. McDermott, principal with Stratford Advisory Group Inc., Chicago. In fact, when consultants at Stratford tried to construct an absolute value peer group for performance comparison, they gave up; the sample was just too small to be meaningful, Ms. McDermott said.
Straying from the indexes
Performance is the biggest of deep value managers' problems.
While all value managers have been enduring a difficult down-market cycle for the past few years, performance problems are worse for active managers who stray far from the standard benchmarks, the Russell 1000 Value index and the S&P/BARRA Value index.
That's because market conditions have pushed the value indexes this year toward more of a growth profile at a time that growth stocks handily outperformed value stocks.
"There are `growthier' stocks within the Russell 1000 index, things that traditional value managers say they'd never buy," said Jeff Nipp, head of investment research at Watson Wyatt Investment Consulting, Atlanta. "(That) means that value managers have been hit by a double whammy. Everyone agrees that value has underperformed growth for some time, and every value manager is suffering somewhat. But a lot of value managers have badly underperformed their benchmarks because they won't buy the growthier stocks."
Those factors have prompted some pension executives to throw in the towel and move to being more relative value managers, he noted.
A report from Barrow, Hanley, based on the reconstituted Russell indexes, said: "From what appears to be a market capitalization bias within the construction methodology, a few of the largest stocks within the growth index are being assigned weights in the value index . . .
"An observation can also be made that the concentration of the largest stocks within the value index is increasing." The report noted the p/e ratio of the top 30 stocks in the Russell 1000 value index is 24.3. Such statistics are why "a lot of value managers just don't follow the index because of the growth component," Watson Wyatt's Mr. Nipp said.
"But what they do is not, perhaps, what the client really needs."
What pension executives need are value managers that are more flexible and adaptable, said Meredith Brooks, New York-based managing director and head of institutional investment services for Frank Russell Co., Tacoma, Wash.
"You can't be as dogmatic about style. Look at some of the great gurus of investing -- Peter Lynch and Warren Buffett -- they weren't dogmatic about style.
"Style, as it relates to value, is not as important as being good at picking good stocks in a particular opportunity set," Ms. Brooks said.
"To hold up your hand and say that you're staying still, sticking to old valuation methods, is to hold up your hand and say: `I've become a dinosaur.' "
A less rigid approach to value investing, said consultants, allows sponsors to look at a whole new universe of so-called "adapters," value managers that have embraced market changes and now look for companies in sectors and businesses they never would have considered 10 or even five years ago.
"Value management has always been about attitude, rather than a specific metric. Value managers have suffered from tunnel vision and are in danger from not being able to adapt to a new society and the inevitable changes that creates in a new stock market," said David R. Brief, senior vice president, consultant and director of research at Capital Resource Advisors, Chicago.
"More progressive value managers are looking at businesses, not screening out companies on the basis of finite pricing criteria. It's hard these days to support a stock screening model that looked at businesses that are `values' but were too expensive according to the screens," Mr. Brief said.
Ms. McDermott of Stratford said consultants there are looking for value managers that recognize when their screening criteria need an overhaul in response to changing market conditions.
Those value managers who have been adapting to new market conditions and, hence, improving their performance, have been winning some clients lately, said Brian Collins, head of U.S. manager research at Mercer Investment Consulting, Chicago.
"Traditional value managers do have a place within portfolios, especially those where you're trying to balance a very pure growth play (elsewhere). But there's a lot more openness now to less traditional value management styles," Mr. Collins said.
Among the firms Mr. Collins said are gaining new business are Iridian Asset Management LLC, Westport, Conn., and Pacific Financial Research Inc., Santa Monica, Calif. -- "managers that can't be put into relative or traditional value boxes."
Watson Wyatt's Mr. Nipp added Equinox Capital Management LLC, New York; Wellington Management Co. LLP, Boston; and TCW Asset Management Co., Los Angeles, to the list.