Small- and midcapitalization stock managers took six of the top 10 positions among separate accounts in the year ended March 31, despite the dominance of large-cap stocks in the period, according to composite data from the latest Pensions & Investments' Performance Evaluation Report.
Specialty composite styles in energy and real estate also performed well for the one-year period, PIPER data show.
But the median PIPER manager significantly lagged the Standard & Poor's 500 Index, dominated by large-cap issues, for the year. (All reported returns are as of March 31).
The median separate account PIPER manager returned 15.7% for the year, while the S&P returned 19.8%. The Russell 2000, a small-cap index, was up 5.1% in the same period.
Longer term, the median PIPER manager also lagged the S&P 500, returning 18.8% for the three-year period and 15.7% for the five-year period, compared with the S&P 500 returns of 22.3% and 16.4% respectively. (All returns for periods greater than one year are annualized).
The Russell 2000 returned 12.7% for the three years and 12.8% for the five years.
Shorter term, the median PIPER equity separate account manager returned 0.5% in the quarter, while the S&P 500 returned 2.7% and the Russell 2000 was -5.2%.
The median large-cap manager in the PIPER separate account database returned 17.1% for the year, 1.4% for the quarter and 20.1% for the three-year period.
Meanwhile, the median small-cap manager returned 9.7% for the year, -4.3% for the quarter and 16.3% for the three years.
From a style standpoint, the median value separate account manager soundly beat the median separate account growth manager for the year.
The median value equity manager returned 17.2%, while the median growth equity manager returned 11.1%.
In the same period, the Russell 3000 Value Index returned 17.8%, while the Russell 3000 Growth Index returned 15%.
The performance difference was just as wide for the quarter, with the median value equity manager returning 1.5% while the median growth manager lost 3.3%. The Russell 3000 Value Index was 2.3%, and the Russell 3000 Growth returned -0.54%.
The top-performing overall separate account for the year was the energy composite of State Street Research & Management Co., Boston, which was up 47.5%. The composite also ranked fifth in the three-year period with 30.2%, and sixth for the five-year period with 25.5%.
Daniel J. Rice III, senior vice president for State Street Research, said the portfolio has benefited from takeovers in the energy sector.
He said the firm tries to buy stocks at a price of about five times cash flow and growing 20%.
Portfolios had a 77% weighting to energy exploration and production companies and 23% allocation to oil service stocks, he said. While it holds about 95 companies, 42% of the portfolio is in the strategy's top 10 holdings, he said.
The strategy is likely to be shut down to new investors at the end of the summer, he said.
INVESCO Realty Advisors, Dallas, reported the second ranking equity separate account manager in the one-year period for its REIT Investment Management account. It returned 36.8%, while the NAREIT Equity REIT Total Return Index returned 33.2%.
Joe Rodriguez, director of real estate securities at INVESCO Realty, said office, hotel and industrial sectors of the REIT market contributed to the composite's strong performance. Others working on the account are Todd Johnston and Jim Trowbridge, both portfolio managers for INVESCO.
Even in sectors that underperformed, INVESCO was able to pick REITs that performed relatively well, Mr. Rodriguez said.
A few initial public offerings also boosted performance, including Arden Realty Group Inc. and Kilroy Realty Corp., he said. Both REITs focus on office properties in southern California.
He said that while INVESCO Realty doesn't do a lot of active trading, it doesn't hold securities for a long time either. Typically, a security will be held from six months to about two years, he said.
The midcap strategy of Forstmann-Leff Associates Inc., New York, ranked third among all equity separate account managers for the one-year period with 34.7%.
Forstmann-Leff's strategy gained from focusing on companies on the large end of the midcap spectrum, said Sarah J.R. Kaye, senior vice president and director of client relations, in a prepared statement.
Consumer retail stocks were particularly productive for the strategy, including OfficeMax Inc. and Barnes & Noble Inc.
Also, midcap strategy portfolios had holdings in Great Western Financial Corp., which is the subject of a bidding war between H.F. Ahmanson & Co. and Washington Mutual Inc.
Technology stocks that did well for Forstmann-Leff include: Allen Group Inc., EMC Corp. and Symbol Technologies Inc., she said.
Looking ahead, Forstmann-Leff managers favor OEC Medical Medical Systems Inc., a portable X-ray equipment maker. The company stands to profit if less-invasive methods of open-heart surgery take hold, Ms. Kaye said.
Holt-Smith & Yates Advisors, formerly Holt-Smith & Renk, Madison, Wis., reported the fourth highest ranking equity separate account with its growth-at-a-reasonable-price approach.
Holt-Smith & Yates managers use a growth screen and then seek companies with a price-earnings ratio equal to or better than the market, said Marilyn Holt-Smith, managing director. They don't have any capitalization requirements and typically own 20 to 25 different stock names, which are not turned over very quickly, she said.
In the one year period, Holt-Smith & Yates sold three stocks and bought one, she said.
Holt-Smith & Yates approaches the purchase of a company's stock as if they were going to buy the whole company, she said.
Kristin Yates, managing director, said Dell Computer Corp. and American Power Conversion Corp. are two technology stocks that have performed well for their portfolios. Dell, which returned 449% for them in the one year period, has been in their portfolios for five years, she said. At the same time, American Power Conversions was up 157%, she said.
She noted the strategy isn't technology-focused, with other big holdings in Walt Disney Co., Barnes & Noble, American International Group Inc., Walgreen Co. and Newell Co.
Oppenheimer Capital, New York, reported the fifth-ranked equity separate account composite for the year, with its concentrated value equity strategy returning 33.4%.
Jeff Whittington, portfolio manager at Oppenheimer for the strategy, declined comment.
J.L. Kaplan Associates, Boston, reported the sixth-ranked strategy with its small-cap value discipline. Paul Weisman, portfolio manager for Kaplan, said the firm uses a particular rule for determining which stocks go into their portfolios.
They look for low price-earnings ratios, and define a low p/e as the reciprocal of the long-term corporate AA-rated bond rate, he said.
So if the stated corporate bond yields 7%, then the p/e they will use as a cut-off is about 14, he said. They use their internally generated estimate of the forward 12 months of earnings in calculating p/e.
Other criteria include a desire for companies with strong balance sheets and low debt levels relative to their peers. Kaplan managers also prefer to use free cash flow as a gauge over a company's stated earnings, he said.
In addition, Mr. Weisman said Kaplan uses qualitative analysis. They won't include a stock in their portfolios unless Kaplan managers believe it has a shareholder orientation, integrity and it will grow faster than the consensus for expected inflation, he said.
Companies that have performed well for them include those that have been the buyer in merger deals. Cambrex Corp., a specialty chemical manufacturer, increased earnings, raised its growth rate and saw its share price rise 50% after the purchase of the chemical business of another company.
Neumeier Investment Counsel L.L.C., Carmel, Calif., had the seventh-ranked separate account composite strategy for the one-year period, with a return of 33.2%, and the third-ranked separate account composite for the 10 years as well, with a return of 20.7%.
"We buy our stocks very cheap," said Peter Neumeier, president. Neumeier portfolios have an average p/e of 10.5 or 11, using expected earnings for the calendar year, he said.
Their strategy benefited from takeovers, five out of 31 companies it owned in the period were bought out, he said.
He also said they are not afraid to concentrate portfolios, and typically will hold about 25 stocks.
Companies that performed well for Neumeier include Castech Aluminum Corp., an aluminum fabrication company that was taken over, and Innovex Inc., which tripled in value over a six-week period, Mr. Neumeier said.
The eighth-ranked equity separate account strategy is the small-cap equity composite of Skyline Asset Management, Chicago.
William Dutton, president and portfolio manager for Skyline, said performance has gained from the strengthening U.S. economy.
As a result of the bottom-up analysis, portfolios have been overweighted in consumer stocks and industrial companies, which Mr. Dutton said are economically sensitive.
Ken Kailin, a principal and portfolio manager, noted Skyline's approach is "often a little bit contrarian," focusing on companies that are a bit out of favor.
Its five biggest holdings are: Allied Group Inc., Interpool Inc., Furon Co., Interface Inc. and Delphi Financial Group Inc.
The ninth-ranked manager overall was Paradigm Capital Management, Albany, N.Y., with its small-cap value composite return of 31.5%.
John T. Mastriani, president, said the firm emphasizes a stock selection process, rather than a top-down process.
"We believe especially now .*.*. that stock selection is critical," he said. They try to find overlooked companies, using in-house research.
The median capitalization in Paradigm's small-cap strategy is about $250 million, he said.
The 10th-ranked overall equity separate account composite is the small- to midcap strategy of First Pacific Advisors, Los Angeles, with a return of 31.3% for the year. The strategy also ranked eighth in the three-year period with a return of 28.5%, and fourth over 10 years with 20.4%.
First Pacific uses "a contrarian value investment approach, focusing on individual companies and sectors that are out of favor, and companies with a long-term investment horizon," said Robert L. Rodriguez, principal and chief investment officer.
He said returns in the 12-month period surprised him, with the big run-up in large-cap stocks.
Stock selection was key for First Pacific, with certain retailers performing well, despite the fact retailing in general was out of favor, he said. Those stocks include: Ross Stores Inc., MacFrugal's Bargains Closeouts, Michaels Stores, FabriCenters of America and Claires Stores Inc. (The firm since has sold Claires.)
They also had positive contributions from a couple of tech-related stocks, such as Storage Technology Corp. and Seagate Technology.
All manager holdings are subject to change prior to publication.
PIPER data are compiled by RogersCasey & Associates, Darien, Conn.