LARKSPUR, Calif. Tukman Capital Management Inc. took a hit in recent months when the loss of one client took nearly half its assets.
Poor performance is partly to blame, but at least some clients blame the markets more than the manager and plan to stick with the megacap firm.
Being a megacap manager has been a miserable thing to be, said Dan Grossman, vice president at the $5.7 billion firm, which runs a highly concentrated portfolio holding between 15 and 20 of the largest 100 U.S. stocks. It looks at cash-generating companies with a high return on equity and tries to buy those companies when they are undervalued, said Mr. Grossman.
That approach is largely out of favor in an environment where investors are chasing higher risk and higher returning securities farther down the capitalization scale.
In 2006, Tukmans portfolio returned 15.22%, lagging the S&P 500 index by 0.59 percentage point, according to data on eVestment Alliance.
For 2006, the median manager returned 14.4%, while the manager in the 95th percentile returned 22.8%, according to data by Casey Quirk & Associates LLC, Darien, Conn., which followed managers with similar tracking errors and strategies as Tukman.
The firms annualized three and five-year returns, for the period ended Dec. 31, lagged the index by 5.15 percentage points and 2.75 percentage points, respectively.
Mr. Grossman blames the returns mainly on market conditions and said megacap stocks will be in favor again, we just dont know when.
Historically, the firms numbers have soared. In 2000 and 2001, for example, the firm beat the index by 24 percentage points and 8.6 percentage points respectively.
After 9/11, there was a flight to quality, said Mark Stahl, senior vice president in the global managers research group at consultant Callan Associates Inc., San Francisco. If there is a significant downturn in the market, there is a view that megacap stocks will be a safe haven, he said.
How they fit
In May 2002, when Tukmans returns were buoyed by the recent strong performance, the $38.1 billion Alaska Permanent Fund, Juneau, tapped the firm to round out its domestic equity portfolio.
Its not just about returns but how they fit into our portfolio, said Mike Burns, executive director at the Alaska fund. Tukman now runs $530 million for the fund and Mr. Burns said there are no plans to reduce or terminate the account.
Officials at the fund have had extensive conversations about performance with Tukman staff, including Mr. Grossman, said Mr. Burns. They stick to their knitting, he said of the firms investment strategy. The board was impressed with: This is what we do, and were going to stick with it. That candor is refreshing, said Mr. Burns.
He admits the fund hired the manager when it was at the top of its game. Staff at the fund now joke about the Tukman effect, referring to the seductiveness of looking at the most recent returns, said Mr. Burns.
Tukman had $5.7 billion in assets as of Dec. 31 after losing an assignment worth more than $4 billion. The firm was terminated as subadviser for the $39.6 billion Vanguard Windsor II Fund in December. John Demming, a Vanguard Group spokesman, said the board of trustees dropped Tukman only partly because of performance reasons. He could not provide further details.
Mr. Grossman said Vanguard was looking for managers that could run larger mandates than Tukman could take on.
At least one pension fund has recently handed more money to the firm. The $11 billion Public Employee Retirement System of Idaho, Boise, added $100 million to the firms portfolio in late 2006, bringing the account to $320 million, said Robert Maynard, chief investment officer. From our perspective, its the market, its not them, he said of Tukman, which has run money for the fund for more than a decade. When the rest of my portfolio stops working, you want them there, he said.
Another Alaska fund, however, has the firm on its watch list. The Alaska Retirement Management Board, which manages $15.3 billion in pension assets, has had the firm on watch for performance since 2005, confirmed Zachary Hanna, a state investment officer. The board hired the firm in 2000, and Tukman now runs $330 million for the plan. Mr. Hanna declined to comment further.