Many investment consultants are experiencing intense deja vu as they search for U.S. large-capitalization growth equity managers they are comfortable recommending to pension fund clients.
While the overall performance of institutional large-cap growth managers has been poor since March 2000, the performance of true-to-style, aggressive growth players has been absolutely awful, compared to more moderate growth-at-a-reasonable-price managers.
Consultants said they are reminded of what they and their clients went through in 1998 and 1999, when there was huge disparity between returns of growth and value stock managers. Back then, value managers with a growth bias had far better performance than pure value players. The same scenario is playing out today in large-cap growth.
"The deeper growth you are, the worse you're going to look right now," said Kevin Leonard, vice president in the Boston office of Segal Advisors Inc. "The names that pop up now at the top of the charts - you have to ask if they are true growth stock managers. If they are outperforming the Russell 1000 Growth index substantially, are they buying names that aren't real growth stocks or managing to a core mandate?"
The median performance of separate account composites among institutional large-cap growth managers was -26.4% for the year ended Dec. 31, according to data from PIPER, a manager performance database owned by Pensions & Investments. That median outperformed the abysmal -27.9% performance of the Russell 1000 Growth index, but only managers in the first and second PIPER decile rankings managed to edge out the -22.1% return of the Standard & Poor's 500 index.
Annualized money manager returns were better relative to the -0.6% return of the S&P 500 index for the five years ended Dec. 31, with the first through fifth deciles outperforming the S&P 500, and almost all managers besting the -3.9% return of the Russell 1000 Growth index, according to PIPER.
For the 10-year period, however, only managers in the top two deciles outperformed the 9.3% return of the S&P 500, although once again, most managers did better than the Russell 1000 Growth index's 6.7% return.
This performance has led many pension fund officials to scrutinize their large-cap growth managers as closely today as they scrutinized their large-cap value managers a scant three years ago.
Some, including the $438 million Cambridge (Mass.) Retirement System, are looking for better performers. The Cambridge fund is looking for a manager to handle $39 million to replace Putnam Investments, Boston, which managed a large-cap growth portfolio for the fund and was terminated.
But consultants are hard-pressed to come up with short lists of large-cap growth managers.
It is "really hard to put together a large-cap growth search this year because so many continue to have horrendous performance. It's very, very tough out there," said Susan McDermott, a consultant at Stratford Advisory Group Inc., Chicago.
Consultant Michael Rosen of Angeles Investment Advisory LLC, Santa Monica, Calif., agreed. "A lot of growth managers rode the style wave and looked great when the market favored them. ...But when the market is bad, they give back a lot of that. When the tide is out, you see them swimming naked," Mr. Rosen said.
Sheila Noonan, director of manager research for CRA RogersCasey, Darien, Conn., said poor performance is leading to other stresses on growth managers that make consultants nervous, such as high personnel turnover, staff cuts and organizational instability. "It really does remind me of 1999, when value managers exhibited a lot of the same symptoms."
The problem for consultants constructing a list of large-cap growth candidates is that on an absolute basis, even the best performer in the asset class for the year ended Dec. 31 - Lateef Management Associates, Greenbrae, Calif. - was down 4.53%, according to PIPER data.
The next best performer was Groesbeck Investment Management Corp., Paramus, N.J., which was down 4.74%, followed by the -7.06% return of Fifth Third Bank Investment Advisors, Cincinnati.
And while "this environment could create a good chance for boutiques to thrive," as Ms. Noonan said, other consultants are having problems finding large-cap growth top-performers - small or large - that their institutional clients even recognize.
A quick look at PIPER's 25 top-performing large-cap growth managers, reveals a slew that are not well-known in the institutional market place or don't manage enough assets to qualify as contenders for many pension plans. The only big player in the top 25 - GE Asset Management, Stamford, Conn. - is a manager of managers.
Consultants find that small firms without a strong institutional focus have poor name recognition among plan sponsors and trustees.
"I can see plan sponsors wrestling with `Who is this guy?' when I have to introduce them to a manager no one really knows. Some clients are a bit less reluctant to look over small managers, but most insist on a manager with critical mass," said Jack Dyer, vice president in the Somerset, N.J., office of Aon Investment Consulting.
Angeles' Mr. Rosen agreed. "Critical mass is important to sponsors. If the manager only has $50 million under management, you don't want to give them another $50 million," he said. Mr. Rosen said he and his colleagues have started to analyze large-cap growth managers that have sufficient asset mass in other market niches - retail, in the case of Marsico Capital Management LLC., Denver, and high-net-worth individuals, in the case of W.P. Stewart & Co. Ltd., Hamilton, Bermuda.
Another problem with very small managers is that they often cannot support the demands of an institutional clientele, said Rodger Smith, managing director, Greenwich Associates LLC, Greenwich, Conn.
"Do they have the systems needed for client service? Do they have the depth on the investment team to manage the business if the CIO is out marketing or putting out other fires?"
"Bigger firms tend to have more capital behind them, more stability, more process, more style integrity, more analysis and attribution, more commitment. It's why sponsors are more comfortable with them," Mr. Smith said.