Non-traditional separately managed accounts and commingled funds scored the biggest returns in the equity area during an otherwise dismal second quarter, according to the Pensions & Investments' Performance Evaluation Report. Also, value equities continued to outperform growth.
"It was a very brutal quarter for equities," said William Ricks, chief investment officer of AXA Rosenberg Investment Management LLC, Orinda, Calif., whose company had two of the top performing separately managed equity accounts, which rose to the top of the list because of their unusual investment styles.
Of the top 15 performing separately managed equity accounts in the second quarter, there were four real estate investment trusts, three long/short strategies, three market-neutral accounts and a short-only strategy.
But overall, the second quarter was a down one for most separately managed accounts and commingled equity funds, with median returns of -10.9% and -12%, respectively.
Benchmark indexes also headed into negative territory in the second quarter. The Standard & Poor's 500, Russell 1000 and Russell 3000 indexes had returns of -13.4%, -13.5% and -13.1% respectively. The Russell 2000 index performed only slightly better with -8.4%.
"It was a reasonably good quarter for value compared to growth," said Mr. Ricks. The Russell 1000, 2000 and 3000 value indexes returned -8.5%, -2.1% and -8%, respectively while the corresponding Russell growth indexes returned -18.7%, -15.7% and -18.5%.
The top-performing separately managed equity account for the quarter was the Minneapolis-based Leuthold Weeden Capital Management AdvantHedge account, a short-term domestic equities holder that, despite its name, is not a hedge fund, said Chuck Zender, Leuthold co-portfolio manager. The account returned 23.5% in the second quarter, and was also near the top of the equity portion of the PIPER universe in the one- and three-year periods prior to June 30 with 31.8%, and 24.7% respectively.
Rounding out the top five separately managed equity accounts were BNY Asset Management, New York, Core Large Cap Equity, which returned 16.4% for the quarter; AXA Rosenberg's U.S. Value Long/Short, 15%; DLIBJ Asset Management Inc. Innovest Quant Long Short, 13.7%; and AXA Rosenberg's U.S. Large Cap Long/Short, 13%.
The 10-year-old AdvantHedge is designed for investors who believe the market will go down but also want a long-term investment, said Mr. Zender. Leuthold uses a 14-factor model every two weeks that identify stocks it feels will underperform the S&P 500. The $70 million account holds an average of 45 to 65 stocks at any given time, said Mr. Zender. Holdings remain in the portfolio for an average of 10 weeks, he added.
Unlike many institutional managers that lost money in the down market, Leuthold reaped the rewards of being short-term securities holders. Also, due to buying short, AdvantHedge made money in the telecommunications and technology sectors.
Long/short strategies also fared well, with three in the top five overall performers in domestic equity accounts.
AXA Rosenberg's U.S. Value Long/Short account is 7 years old and has $500 million in assets. It is evenly divided between long and short issues. Typically, the account goes long on value stocks and short on growth stocks. All stocks are in small- or midcap companies. "The value style was rewarded. ... The stocks we shorted really fell out of bed," said Mr. Ricks.
AXA made gains by shorting stocks in the pharmaceuticals, biotechnology and telecommunications sectors. Some of the top short performers were Sepracor Inc., RF Micro Devices Inc., Cablevision Systems Corp. and Advent Software Inc. The company gained in long-term holdings in Lennox International Inc. and Pacificare Health Systems Inc.
The strong showing of REITs is tied to a high dividend yield compared with the rest of the market, said Jeffrey Gandel, senior vice president and investment director at Fidelity Management and Trust Co., Boston. The Fidelity Management REIT account was one of three REITs in the top 10 performing separate equity accounts in the quarter with 6.4%.
The 8-year old, $900 million Fidelity account buys high-quality REITs with strong balance sheets, he said. The account is benchmarked to the National Association of Real Estate Investment Trusts Equity index. In the second quarter, Fidelity's portfolio was overweighted in the industrial and apartment sectors and underweighted in the lodging and office sector. The latter groups do not perform well in down markets, said Mr. Gandel.
Although the portfolio is diversified across all sectors and U.S. regions, Mr. Gandel said, "there's obviously markets we like more than others." One market is the Washington, D.C., area, doing well due to a strong local economy. On the down side is the San Francisco area, which stiff suffers from lingering effects of a poorly performing technology sector.
Domestic value and growth equity accounts were disappointing. Only six growth accounts out of a universe of 497 and 18 value accounts out of 468 managed positive returns.
Chase Investment Counsel Corp., Charlottesville, Va., was one of the few bright spots for growth with its 8-year old, $50 million Midcap Growth Equity account. It garnered a 3.5% return in the second quarter, beating its Russell Midcap Growth Index benchmark by 2,176 basis points. In addition, the account returned 8.7% for the year ended June 30.
"Our process has moved us away from some of the worst performing sectors," said David Scott, senior vice president and senior portfolio manager.
In the second quarter, Chase benefited from its growth-at-a-reasonable-price style of investing, said Mr. Scott, with stronger performance in the consumer goods, health care and financial sectors. Mr. Scott mentioned Trigon Healthcare Inc., WellPoint Health Networks Inc., Pepsi Bottling Group Inc., Patterson Dental Co. and Fidelity National Financial Inc. as holdings that performed well in the second quarter.
Tops in value
The top performing domestic value account was Small Cap, a product of Valuation Metrics, a wholly owned subsidiary of New York Life Investment Management Holdings LLC, also of New York. The account returned 6.2% in the quarter and 16.3% for the year ended June 30.
Kathy O'Connor, managing director, said the small bank, home building and diversified financial sectors all returned well for Valuation Metrics.
"The interest rate environment has created a strong economic scenario for these companies," said Ms. O'Connor. She explained that banks are still collecting 6% on new home loans and the banks' cost of capital has declined.
Ms. O'Connor mentioned Flagstar Bancorp Inc., Brookline Bancorp Inc., Novastar Financial Inc. and Hovnanian Enterprises Inc. as good performers for the quarter and year.
The 15-year-old, $212 million account holds an average of 200-300 names, said Ms. O'Connor.