SAN FRANCISCO - Robertson Stephens Investment Management signed an agreement to manage a U.S. equity fund to be marketed in Japan by Nomura Securities Co. Ltd.
The firm's first overseas venture will use the value + growth style of mutual fund portfolio manager Ron Elijah. Mr. Elijah's aggressive mid- and large-capitalization strategy earned 42.7% in 1995 but is down 2.47% in the year to date through Aug. 30.
By comparison, the Standard & Poor's 500 index was up 37.58% in 1995 and 7.45% for the year to date through Aug. 30.
The new Japanese unit trust, called the Robertson Stephens & Co. 21st Century Fund Series, will be distributed to Japanese banks, insurance companies and pension funds by Nomura Securities, Tokyo, and Nomura International PLC, London.
The Nomura account is just another example of the rising visibility of Robertson Stephens, which is much higher than its $3.5 billion under management would imply. The reason is performance. A system of star portfolio managers showcased in print advertisements and to financial advisers has served the firm well.
The firm's $1.045 billion Contrarian Fund, run by Paul Stephens, a founder of the firm, is one of the year's top performing stock funds with a gain of 24.53% in the year to date ended Aug. 30. Contrarian, which uses short selling and favors natural resource stocks, is probably the only mutual fund that employs a full-time geologist.
Robertson Stephens has been hiring top talent from other firms. It already has landed a number of subadvisory variable annuity accounts following the addition of John Wallace in 1995, who formerly managed the Oppenheimer Main Street Income & Growth and Oppenheimer Total Return funds. Mr. Wallace's Growth & Income fund, introduced July 12, 1995, already has $270 million and was up 21.95% in the year ended Aug. 30 and 13.7% in the year to date. He also runs Diversified Growth, launched Aug. 15, which uses the same midcap strategy but without an income component.
The firm's oldest fund, Robertson Stephens Emerging Growth, is now being managed by Jim Callinan, formerly portfolio manager of the $2.4 billion Putnam OTC Emerging Growth fund. In July, he took the helm of Emerging Growth so that its former manager, Dave Evans, could devote more time to the firm's $30 million in institutional small cap growth accounts. Mr. Evans also runs a MicroCap Growth fund, launched Aug. 15. Small companies are a key focus of the firm because its investment banking affiliate has roots in the venture capital business.
The firm also has launched a small-cap value fund, Robertson Stephens Partners Fund, managed by Andy Pilara, who is on the Contrarian team and also runs a new Global Natural Resources fund. Mr. Pilara and Paul Stephens teach an investment course at the Haas Business School of the University of California and are among the few investors using Stern Stewart & Co.'s economic value added concept. They also employ the value approach of HOLT Value Associates in Chicago.
Stern Stewart's approach measures the difference between a company's rate of return on capital and its weighted average cost of capital. HOLT measures a company's cash flow return.
In addition to the Nomura venture, Robertson Stephens is registering offshore hedge funds in the Cayman Islands. It already runs hedge funds for private investors in the U.S.
The firm's subadvisory business is also growing. It recently signed on with two insurance companies - American Skandia Life Assurance Corp. and Equitable Life Insurance Co. of Iowa - to subadvise variable annuity products also using the Value + Growth strategy, according to Bill Ring, managing director and head of sales and marketing. Equitable's product also is using Mr. Wallace's growth and income strategy. A third insurer, Ohio National Life Insurance Co., also signed on with the firm for the growth and income strategy.
The firm also is interviewing several record keepers about forming an alliance to develop a full service 401(k) product for small plans with as few as 50 employees. The firm's investment banking affiliate has relationships with a number of small companies who would be good prospects for the program, Mr. Ring said.
Robertson Stephens growth funds are not for the faint-hearted. Value + Growth has been particularly volatile. The fund is down 2.47% in the year to date through Aug. 30 and down 11.56% in the year ended the same date. But its three-year record - with an average annual return of 22.35% - is strong, compared with 14.98% for the S&P 500's average annual return.
Emerging Growth, launched Nov. 30, 1987, has also had a bumpy ride. The fund gained 9.57% in 1990 and 58.7% in 1991 before dropping 2.55% in 1992. In 1993 and 1994 it gained 7.22% and 7.96% respectively; and it rose 20.31% in 1995. In the year to date through Aug. 30, it's up 6.14%.
Contrarian's performance has been somewhat steadier. The fund, launched June 30, 1993, gained 11.86% in the first half of 1993; dropped 5.52% in 1994 and gained 30.86% in 1995.
Andy Pilara, managing director and co-portfolio manager of Contrarian - which has a 21% short position; 3% in S&P 500 puts and 4% in cash - said: "Believe it or not we really don't time the market."
Indeed, the fund's short position, which has been a key contributor to returns, has been fairly consistent since the fund's inception more than three years ago. The $44 million Partners fund, which he also manages, has more than 50% in cash thanks to heavy inflows and a dearth of good buys in the market, said Mr. Pilara.
Mr. Pilara shorts stocks in the very sectors Emerging Growth loves - medical technology, instruments and services.
"They're different stocks," he says.
His decisions are based on a stock's "economic value added."
"We've seen a number of companies and industries having trouble investing capital to get a weighted average return on their capital that's higher than their weighted average cost of capital." That figure is a company's EVA.
"We don't use earnings per share calculations because it fails to consider the capital required to generate those returns," said Mr. Pilara, who has no idea what his portfolio's price-earnings ratio is.
"To us, cash flow and capital are everything. Dividends are the biggest trap you can (fall into)."
His bottom-up approach has led him to energy stocks, which have underperformed the market for 15 years. He especially likes Canadian natural gas companies.
Contrarian holds long positions in about 86 companies and has relatively low turnover. Yet its expense ratio is steep at 2.45%, owing in part to its heavy foreign exposure. Mr. Pilara justifies the expense by deeming it a public hedge fund. "We think Paul Stephens is akin to one of the star portfolio managers in the hedge fund world. Hedge funds charge 20% of profits," Mr. Pilara said.
Because Contrarian shorts stocks without using leverage, it poses no unrelated business income tax problem to institutions. Mr. Stephens also runs private hedge funds.
