Median equity returns for the third quarter were among the lowest recorded by Pensions & Investments' Performance Evaluation Report in nearly a decade.
Managed equity accounts posted a median return of -14.3% for the quarter ended Sept. 30. Commingled accounts had a median -12.8% return for the period. There were 914 accounts in the managed survey, 283 in the commingled.
Results that low have not been recorded since the third quarter of 1990, when the median managed account returned -15.3% and the median commingled account return was -13.7%. The Standard & Poor's 500 stock index returned -13.9% for that quarter.
Another notable period was the fourth quarter of 1987, when the median PIPER manager returned -21% and the S&P 500 returned -22.5%.
Comparatively, the S&P 500 index was down 10% for the recent quarter ended Sept. 30.
The current performance downslide initially erupted in the fall of 1997. The market swung back in the first quarter of 1998, but PIPER data indicate performance returns eroded again in the second quarter ended June 30 and declined even further in the third quarter.
THE TOP GUNS
Two types of equity portfolios led both the managed and commingled rankings in the quarter -- those concentrating on utilities, and those using a market-neutral strategy.
Investors fleeing to industries less exposed to the global markets found themselves with electric utility stocks. Market-neutral equity strategies, which normally offer relatively low yields for equity but are promoted as a safe position in times of stock volatility, were put to the test.
The leading performance for overall managed equity accounts in the quarter was the 5.6% return earned by the SectorPlex Utilities account of Trinity Investment Management Corp., Bellefonte, Pa.
Trinity's SectorPlex also was the second overall top performing portfolio for the 12 months, with a 34.6% return. Its benchmark is the Russell Utilities index, which was up 5% for the third quarter.
The fund was helped by the defensive strategies of investors seeking a yield higher than bonds, John Pomeroy, portfolio manager, said.
"With the falling interest rates, electric utility stocks were up because of the high dividend, although they aren't as generous as they used to be because of deregulation. But still, it's more than most common stocks pay," Mr. Pomeroy said.
The dividend yield on Trinity's portfolio was 3% at the end of the third quarter, compared with 1.6% for the S&P 500. The portfolio's sector allocation tracks that of the Russell benchmark, which is 62% telephones, 28% electric utilities and about 2% in natural gas.
The benchmark has less than a 10% holding in cable TV stocks, which Trinity does not.
Other leading managed accounts in the overall equity category were Fidelity Management Trust Co., Boston, with a 4.7% return on the Select Market Neutral portfolio; Rosenberg Institutional Equity Management, Orinda, Calif., with 4.1% return on its market-neutral portfolio; W.H. Reaves & Co. Inc., Jersey City, N.J., 4.1% with its Utility/Energy equity strategy; and INVESCO's New York office ranked fifth with its 1.9% return on its Quantitative Long/Short Cash portfolio.
Among commingled managers, only two managers posted positive results for the quarter in the overall list of commingled account managers -- Barclays Global Investors of San Francisco and State Street Global Advisors, Boston.
Barclays came in first with 1.65% in a passive intermediate utilities strategy. The benchmark for the fund, the BGI Intermediate Capitalization Utilities index, returned 1.42%
Portfolio manager Richard Johnson said the $725 million account gained in July when Alltel Corp., Little Rock, Ark., acquired the Chicago wireless phone company 360 Degrees Communications. Barclays was holding 360 Communications.
"That corporate action accounts for the majority of the gain," he said. "In that week, we outperformed by 23 basis points. Our objective is to match the index and normally we track it pretty closely."
Other strong players for the portfolio during the quarter: Montana Power Co. was up 29.8%; MidAmerican Energy Holdings Co. was up 23.6%; Energy East Corp. was up 23.5%; Southern New England Telecom was up 19.3%; and Nipsco Industries Inc. was up 18.3%.
State Street Global Advisors posted 0.89% in its Long-Short U.S. equity portfolio. The $150 million portfolio, managed by Dave Hanna, has positions in eight sectors, including technology and financial services. The portfolio is not overlaid with S&P 500 futures.
"While our return wasn't outstanding, we are happy with it. For instance, bank stocks were down 30% to 50%. We had long banks down 30% and short banks down 40%. We still made 10% through that spread," Mr. Hanna said.
Some of Mr. Hanna's long holdings are Lexmark International Inc., a manufacturer of printers, and Arterial Vascular Engineering, which has just been acquired by Medtronic Inc. Short holdings include Boston Scientific Corp. and Monsanto Co.
Rounding out the top five in the quarter among commingled accounts were Associated Bank with a -1.4% return for its Equity Income Fund and Commonfund, Westport, Conn. with a -3.3% return for its Absolute Return Fund.
The one-year median return for managed accounts was -2.9% for the period ended Sept. 30, compared with the S&P 500's 9% return. The leader for the one-year period in managed accounts was Mt. Auburn Management, Boston, with a 56% return for its concentrated large growth strategy.
Other managed equity portfolios in the one-year top five include: a large-cap growth equity portfolio of U.S. Trust Co., New York, with a 33.2% return; the institutional equity portfolio of Campbell, Cowperthwait & Co., New York, with 33.1%; and Holt-Smith & Yates Advisors, Oak Brook, Ill., with 27.2% on an equity portfolio.
The PIPER median commingled account returned -0.7% for one year, 17% for three years and 16% for five years. The top five commingled portfolios for one year are Barclays' Intermediate Utilities, 23.2% return; the large-cap growth portfolio of Hellman, Jordan Management, Boston, 22.2%; the large-cap growth portfolio of Northern Trust Quantitative Advisors, Chicago, 18.4%; Barclays' equity growth fund with a return of 18.1%; and a U.S. equity account of Marvin & Palmer Associates, Wilmington, Del., that returned 17.7%.
Longer term, Essex Investment Management, Boston, posted the top three- and five-year results for managed accounts. The firm's growth equity portfolio returned a compound annualized 45.3% for three years, and 34.1% for five years. In comparison, the PIPER medians were 16.8% and 16.1%, respectively, and the S&P 500 returned an annualized 22.6% and 19.9%, respectively.