James Owens, a partner at Chicago-based LSV Asset Management, which runs $22 billion in large-cap value, said the firm did not drastically change exposures during the past few weeks. Instead, LSV's strategy has “benefited significantly” from the jump in financials against the backdrop of a potential government economic recovery plan, he said. The strategy has a 27% exposure to financials, slightly overweight the 24.3% in the Russell 1000 Value index.
“What you've seen in the past several weeks is the financials having significant bounces off their lows,” he said, noting that prices of some of the financial stocks within LSV's portfolio doubled two days in a row. He declined to name the securities.
Within the financial sector, some small-cap managers have been focusing on local banks that have been relatively immune to the macro conditions plaguing larger institutions.
John O'Toole, senior portfolio manager at the Pittsburgh offices of Mellon Capital Management Corp., said these securities have been a boon to his $7.5 billion microcap strategy over the past three months.
“We've had good success in the financial industry because the banks we own are local in nature. ... These institutions have focused on their local markets.” He declined to name specific holdings.
Todd Perkins, co-portfolio manager of small-cap value strategies at Perkins, Wolf, McDonnell & Co. LLC, Chicago, said “the "do-not-short list' has been the cause of a lot of strength.” Perkins runs $1.4 billion in small-cap value strategies for parent company Janus Capital Group Inc., Denver.
On Sept. 19, the Securities and Exchange Commission blocked the short selling of 799 financial institutions for a period of two weeks in hopes that restricting negative bets on these institutions would help calm the markets. The number of banned firms has since grown to nearly 900.
The firm is slightly underweight financials but has focused on insurance companies, regional banks and thrifts, said Mr. Perkins. “We've been very careful to buy banks and thrifts that are very well capitalized,” he said.
Wurts' Mr. Petroff said the ban on short selling will have positive repercussions across the small-cap equity markets because short sellers typically “preyed” on those securities. The ban, he said, “has definitely alleviated downward pressure.”
Other managers agree.
“As some of the short positions are being unwound, that makes an impact on the less liquid names,” said Lance James, managing director and senior portfolio manager for the small-cap core and microcap strategies at Voyageur Asset Management Inc., Minneapolis. The firm manages $200 million in a small-cap core strategy and $222 million in microcap equities.
That, combined with the potential $700 billion government bailout, has helped boost even the smallest banks, he said. “Clearly some of the smaller banks have bounced back,” said Mr. James. The firm's holdings in Dearborn Bancorp Inc., a Dearborn Mich.-based bank with a $42.6 million market cap, returned 23% for the microcap strategy between Sept. 5 and Sept 23.
Going forward, Mr. James is bullish on consumer discretionary stocks. “Obviously, everyone is quite negative on the consumer, but we've found some real value in brand-name franchises that sell domestically and internationally (who can benefit from) the weak dollar,” he said.
Voyageur holds shares of Movado Group Inc., a watch maker, in both its small-cap core and microcap strategies.