WAYNE, Pa. -A small-cap value portfolio run by Boston Partners Asset Management, Boston, had the strongest performance of all equity portfolios for the year ended Sept. 30, a survey of institutional investment manager performance by Investor Force shows.
Boston Partners' Small Cap Value II strategy returned 32.9% for the year (-14.3% in the third quarter). Its benchmark, the Russell 2000 Value index, returned 5.7% for the year (-13.3% for the third quarter).
"Small-cap value has been the best-performing asset class year to date" for the market, said Jack Coan, director of marketing for Boston Partners.
Talking specifically about his firm's portfolio, Mr. Coan added, "70 of our holdings have been up more than 20% during the holding period. Our stock selection added value in 12 of 13 sectors from the Russell 2000 Value index." For example, he said that in the consumer non-durables sector, the stocks in Boston's portfolio returned 55% for the first three quarters of 2001 compared with a return of 18% for the stocks in that sector in the Russell index. Sola International Inc., an eyeglass manufacturer with a $400 million market cap, was selling at $4 a share when the stock was added to the portfolio in the fourth quarter of 1999. It had reached $15 a share by the end of the third quarter of 2001.
"It was typical of what we try to do: buy stocks that are undervalued and have a catalyst for change" - in Sola's case that was a new management team and its move into manufacturing specialty eyeglasses, according to Mr. Coan.
TCW best fixed income
TCW Group, Los Angeles, had the best performance in the fixed-income categories, with a 33.2% return for the year ended Sept. 30 (10.3% for the quarter) for its Strategic Mortgage-Backed Securities portfolio in the U.S. Investment Grade Fixed-Income category. The Lehman Aggregate benchmark had a 12.96% return for the year (4.6% for the third quarter).
Jeffrey Gundlach, group managing director at TCW, said the portfolio follows an "opportunistic total return investment strategy." Most of the portfolio's investments are in collateralized mortgage obligations, with smaller holdings in collateralized debt obligations and collateralized bond obligations.
"What's unusual about the strategy is there's no fixed duration or maturity target," said Mr. Gundlach. "Most investors don't have the resources to manage them (the securities). They're too complex for many investors to spend much time on."
Oaktree Capital Management, Los Angeles, came in first in the emerging markets equity category with a 27.6% return for the year ended Sept. 30 (5.1% for the quarter). The MSCI Emerging Markets Free index had a -33.3% return for the year (-21.7% for the quarter).
Howard Marks, chairman of Oaktree, said the fund uses a "long-short public equities strategy." He said the product is "heavily researched and follows a completely bottom-up strategy; there are no bets on the direction of markets or sectors." He said the firm does not release names of its individual holdings.
Harris Associates LP, Chicago, came in first in the midcap value strategy, with its midcap value equity portfolio having a return of 28.24% for the year ended Sept. 30 (-6.2% for the third quarter). The Russell Mid Cap Value index returned -0.03% for the year (-27.8% for the third quarter).
Edward Loeb, director of institutional portfolios at Harris, said the firm "sticks to its investment discipline to find the cheapest midcap stocks we can identify." He said the firm focuses most "on free cash flow, which is the best identifier of the cheapness of a stock." He added, "we also invest in businesses where management is incentivized to grow the business because of stock ownership."
Some of the stocks in the portfolio include H&R Block Inc. and Office Depot Inc.
Avoided style drift
Brandes Investment Partners LP, San Diego, came in first in the large-cap value category with a return of 23% for the year ended Sept. 30 (-3.4% for the quarter). The Russell 1000 value index had a -8.9% return for the year (-10.96% for the quarter).
"We're very disciplined and avoided style drift. We stayed true to our value style, and when it came back into favor, we were in a good situation," said Keith Colstock, senior analyst and member of the investment committee of Brandes.
"We run a relatively concentrated portfolio. If some industry goes out of favor and we think it's wrong, we will go out and buy stocks in that industry."
Some of the industries Brandes likes now are tobacco (it owns Philip Morris Cos. Inc.); defense contractors (it owns Raytheon Co., Lockheed Martin Corp. and Northrop Grumman Corp.); and food companies (it owns ConAgra Foods Inc., Sara Lee Corp. and Archer Daniels Midland Co.).
Wasatch Advisors Inc., Salt Lake City, came in first in the small-cap core equity category with its small cap core growth portfolio, which had a 23.9% return for the year ended Sept. 30 (-16.6% return for the quarter). Wasatch also came in first in the small-cap growth equity category with its micro-cap equity portfolio, which had a 19.1% return for the year ended Sept. 30 (-7.98% return for the third quarter).
The Russell 2000 Growth index, the benchmark for both categories, had a -21.1% return for the year (-20.8% for the quarter).
Eric Bergeson, vice president and director of marketing at Wasatch, said that for the small-cap core strategy, "we try to find companies that over the next three to five years will have earnings growth of 15% per year." The firm also looks for companies with a market cap of less than $2 billion that have a trailing price-earnings ratio approximately equal to the expected earnings growth rate. United Rentals Inc., which provides equipment rentals for construction projects, is one of the larger holdings in the portfolio.
In small-cap growth, about half the portfolio is in "core" high-growth stocks with a growth rate of 15% per year. The other half consists mainly of technology companies "that don't have as much predictability but have a growth rate of 25% per year." The maximum capitalization for companies in the micro-cap portfolio is $600 million.
Companies in the portfolio include Amsurg Corp., which runs surgical care centers, and ICU Medical Inc., a maker of needleless IV tubing sets.
In the global fixed-income category, Smith Affiliated Capital Corp.'s global portfolio came in first with a return of 13.99% for the year ended Sept. 30 (6.3% for the quarter). The Salomon Smith Barney World Government Bond index had a 6.7% return for the year ended Sept. 30 (7.2% for the third quarter).
New York-based Smith got its high returns from having about 95% of its portfolio invested in U.S. fixed-income securities.
"We chose to refrain from being global (this year). We view global as a sector we go into on an opportunistic basis," said Robert Smith, chairman of Smith.
In the international fixed-income category, Pacific Investment Management Co., Newport Beach, Calif., came in first with its foreign hedged portfolio having a return of 11.6% for the year ended Sept. 30 (4.11% for the third quarter). The SSB WGBI ex-U.S. had a return of 4.5% for the year (7.8% for the quarter).
Steve Goldman, global product manager at PIMCO, said the fund was "overweight European bonds and focused on the short end of the yield curve. We thought the European Central Bank would be forced to cut interest rates."
Sudi Mariappa, executive vice president of PIMCO, added, "We focus on the very high-quality issuance. We did not go down the credit spectrum like other managers. We also used a bottom-up country and sector strategy that contributed to our outperformance."