Growth firm looking to systematic approach

SAN DIEGO — After several years of bleeding assets, Nicholas-Applegate Capital Management is looking to its systematic strategies for a much-needed transfusion.

Led by Managing Director Stacey Nutt, the 10-person systematic portfolio management team relies on quantitative factors to implement the firm's investment philosophy, which is based on behavioral finance and emphasizes looking at companies undergoing a positive fundamental change with sustainable growth. The model-driven, systematic approach is used on several different styles, including core and growth, said Mr. Nutt, who has been with the firm since 1999 and is a member of the executive committee.

The San Diego-based firm, a subsidiary of Allianz Global Investors, Munich, has 11 strategies in its systematic group, the first of which — U.S. systematic small cap — was introduced in 1990. Other offerings such as U.S. systematic large cap and international systematic came about in 1993 and 2001, respectively. The platform is giving the firm a shot in the arm at a time when Wall Street is widely expecting the market for growth to rebound.

Nicholas-Applegate "bottomed in terms of (total) assets at $13.7 billion in the first quarter of this year," said Horacio Valeiras, chief investment officer. "We're finally heading the right way."

For its part, the systematic strategies group is "growing rapidly" and expects to close out 2005 with $5 billion in assets, jumping from $2.5 billion at the end of 2004, Mr. Nutt said.

The company has won 16 mandates in its systematic strategies and two mandates in its global select equity offerings this year, helping lift total assets under management to $14.8 billion as of Aug. 31. About $4 billion of that comes from systematic strategies, while the remainder is high yield/convertibles ($5.9 billion); international and global equity ($2.5 billion); value ($1.3 billion); and U.S. traditional, which is predominantly growth ($1.1 billion). All figures are as of Aug. 31.

In early September, AssetMark Investment Services Inc., Pleasant Hill, Calif., hired Nicholas-Applegate to subadvise $80 million of AssetMark's $160 million small-to-midcap growth fund, said Gerald Fegler, AssetMark director of investment strategies.

Still, Nicholas-Applegate has a way to go before making a full recovery. As of Aug. 31, assets under management are down 63% from a peak of $40.2 billion at the end of 1999.

At that time, 88% of assets were linked to growth equity strategies, said Susan Hunter, spokeswoman. Today, the mix is more evenly distributed, with growth equity accounting for 40% of the firm's asset base,

"In the late '90s, Nicholas-Applegate got a reputation for aggressive growth products," Mr. Valeiras said. "But we had been managing convertible bonds from early on. We have always been a fairly diversified firm."

Mr. Valeiras said the 63% drop was due to the stock market decline and withdrawals in areas such as domestic large-cap select growth, domestic midcap growth and aggressive growth strategies. As a result, the firm exited the large-cap select business and transferred the midcap growth strategy to its systematic team, he said.

Nicholas-Applegate aims to grow revenue between 5% and 10% a year, and will likely fall into the "low end" of that range this year, Mr. Valeiras said.

The firm has taken several steps to resuscitate business. It restructured investment teams, reined in trading costs, realigned internal compensation and improved analytical skills in response to the Fair Disclosure Regulation. It also acquired the international growth equity business of Duncan-Hurst Capital Management on July 1, which gives Nicholas-Applegate a foothold in international all-cap and small-cap offerings. Nicholas-Applegate gained about $140 million in the acquisition, Ms. Hunter said.

All told, Nicholas-Applegate has 54 portfolio managers, analysts and traders on its investment team, 15 of which joined have joined over the past several years, Mr. Valeiras said. Eighteen investment staff have left the firm since 2002 as a result of product closures and a restructuring in October of that year, Ms. Hunter said. In February 2003, Nicholas-Applegate was reported to have laid off 5% of its investment staff (Pensions & Investments, Feb. 17, 2003).

Talent has been recruited from some top money management firms. For example, Stephen Sexauer joined in 2003 as lead portfolio manager of U.S. large-cap value equities. Previously, he was a senior portfolio manager at Morgan Stanley Investment Management, New York. David Vaughn, who runs the international systematic and global systematic funds, joined Nicholas-Applegate in 2003 from Barclays Global Investors, San Francisco.

The firm no longer has two portfolio managers on a given strategy, turning responsibility over to one individual. Also relatively new is Nicholas-Applegate's compensation structure, now aligned with performance by sector vs. performance by product, Mr. Valeiras said.

"Every one of our analysts but one has outperformed their benchmark since we put the program in place two years ago," he said.

About 78% of its 34 composites or strategies were ahead of their respective benchmarks for the year ended Aug. 31, the company said. U.S. systematic small to midcap growth is up 3.06% this year as of June 30, compared with -3.58% for the Russell 2000 Growth index, according to Morningstar Inc., Chicago.

Although the $52 billion Oregon Public Employees Retirement Fund, Salem, dropped Nicholas-Applegate from emerging company and midcap growth equity strategies between 2003 and 2004, it still has $212 million invested in Nicholas-Applegate's U.S. minicap growth offering, said Kevin Nordhill, equities investment officer at Oregon. Most of that money came from the emerging company and midcap growth equity mandates, he said.

"We really like the team and the (minicap) space," Mr. Nordhill said. "We have a lot of confidence that in a strong growth environment they will do even better."

The thinking on Wall Street holds that value strategies may be losing steam, and given the cyclical nature of the stock market, the pendulum may be poised to swing back to growth investing, said Todd Truby, a mutual fund analyst at Morningstar. Still, rising interest rates and fuel prices are cause for concern, he added.

One consultant reported that growth-related search activity has not yet picked up dramatically. Segal Advisors Inc., New York, has handled about 10 large-cap growth and small-cap growth searches this year, half of which were to replace an existing manager because of personnel turnover or organizational instability, said Gregory Moore, director of research.

"From our client base, (institutional investors) are not tactically saying, ‘Let's take value money off the table and put it into cheaper, more promising sides like growth.'"

At the same time, Holmes Research LLC, Louisville, Ky, which tracks institutional search activity, found that growth placements of all capitalization sizes are outpacing value. So far this year, there have been 64 growth placements, compared with 35 for value.

Mr. Valeiras said he doesn't expect a rebound to mirror the boom times of 1999. But from a valuation perspective, he believes the market is in a "good place for growth to start to outperform."

"The market has not been easy and the industry has seen a lot of changes, but (Nicholas-Applegate has) adapted well, and we are now in a situation where our efforts are beginning to bear fruit," he added.