Small- and medium-capitalization and emerging growth equity managers - many with heavy weightings in technology stocks - clearly dominated the Pensions & Investments Performance Evaluation Report.
During the fourth quarter of 1994, nine of the 10 best performing managers in the PIPER managed account universe were small-, midcap or emerging growth stock managers.
Technology stocks were the best performing sector for the quarter, six months and year ended Dec. 31, and many top performing PIPER managers had substantial weightings in technology stocks. The managers expect certain technology sectors to continue to do well through at least the balance of 1995.
Elimination of regulatory and competitive barriers between telecommunications and cable television industries and increasing competition bode well for technology and telecommunications stocks, according to some managers.
In addition, small-cap managers that focus on industrial companies expect the weakness of the U.S. dollar to help some industrial stocks such as steel, machinery and aerospace defense companies in coming months.
Kopp Investment Advisors, Edina, Minn., topped the PIPER managed account universe for the quarter with a 23.5% return in its emerging growth equity portfolio; the Standard & Poor's 500 Stock Index recorded no gain for the same period. Kopp finished second for the 12 months, with 27.35%, while the S&P 500 returned 1.32%. Kopp also finished second overall for the three-year period with compound annual return of 40% and first for the five years with 46.27%.
The $1.6 billion Kopp emerging growth portfolio follows a "blend of Warren Buffet, Peter Lynch and John Templeton combination of growth and value," according to Leroy Kopp, chief investment officer. It was heavily weighted in technology and telecommunications sectors for the quarter and year.
The 28 to 30 stocks in the portfolio had a capitalization range of between$50 million and $2 billion, he said.
"We don't like to pay up for multiples but we don't mind paying for good growth prospects," he said. "And we buy companies that have been around for a while."
Some of the better performing stocks in the Kopp portfolio in 1994 include California Microwave Inc., DSC Communications Corp., StrataCom Inc. and ADC Telecommunications Corp.
Mr. Kopp said there is "no slowdown in sight" for the technology/telecommunications area. "With the productivity enhancements taking place in the United States and throughout the world ... we expect this group to continue to do well," he said.
He said he expects the stock market to advance 15% to 20% in 1995.
Mary Lisanti, managing director at Bankers Trust Co., New York, who oversees both the BT Small Cap and BT Capital Appreciation Funds, said she, too, anticipates more good returns from the technology sector.
The small-cap fund topped the list of PIPER commingled funds in the fourth quarter with 4.76%; it also finished fourth for the year with 7.4%, and second for the five years with an annualized return of 25.4%. The capital appreciation fund finished fourth among PIPER commingled equity funds for the quarter with 2.76%.
Ms. Lisanti said both funds were overweighted in technology and health care stocks in 1994 and underweighted in consumer, financial, utility and energy stocks.
Some of the better performing stocks in the small-cap fund were Alantec Inc. and Cascade Communications Corp. Examples of stocks in the capital appreciation fund were Bay Networks Inc. and Cisco Systems Inc.
She said the technology theme "could run for the next couple of years" with the deregulation of the telecommunications industry in Europe and the rapid changes in the United States as cable companies enter the telephone market and phone companies gear up to offer new services. Also, lesser developed countries are starting to "spend heavily" on telecommunications and telephone-related facilities.
"All this helps telecommunications-related companies," she said.
For some top performing PIPER equity managers, finishing on top was a matter of "disaster avoidance" and picking the right stocks rather than sector selection, said Wayne J. Archambo, vice president and portfolio manager at Boston Co. Asset Management Inc., Boston.
The Boston Co. Mid Cap Value Equity Fund finished second for the year among PIPER commingled equity funds with 8.55% and third for the three years with a compound anuualized return of 20.08%.
The 75 stocks in the Boston Co. fund have a capitalization range of $400 million to $4 billion and represent companies with low price-earnings ratios with "improving dynamics," said Mr. Archambo.
Positive dynamics include those with strong insider buying or new problem-solving management or diversified companies that sold unprofitable divisions.
"It was more difficult to win in 1994 than in years when the market is rising and when all boats rise," he said. "We avoided some sectors which looked expensive, such as utilities. And we had some good turnaround situations, such as U.S. Shoe Co., which Wall Street was down on in the past but which improved its underlying business and remains our No. 1 position. Rite Aid Corp. was a poorly run company which closed some non-profitable divisions and sold some non-core businesses. Also, George A. Hormel & Co., which is a high-quality company with lots of cash and no debt and improving business.
"We were looking for turnarounds and avoiding the torpedoes."
Mr. Archambo said he expects "more of the same type of market" in 1995, characterized by being able pick the right stocks while avoiding bombs and using a "stock specific" approach to investing.
He said the small- and midcap sectors should continue to do well in 1995. He called midcap investing the "chicken small-cap" area because "midcap offers you comparable long-term returns to small caps but at a lower level of volatility and risk. That's appealing to people especially in markets like we have had."
Technology stocks represent about 9% of the small-cap value equity portfolio at Donald Smith & Co., Paramus, N.J., which finished 1994 in eighth place overall among PIPER commingled funds at 5.56% and second overall for the three-year period with an annualized return of 21.62%.
Donald Smith, chief investment officer, said the fund has "among the lowest price-to-book ratios in the nation" and the 35 to 40 stocks in the portfolio have an average capitalization of about $200 million.
The heaviest weighting, however, was in industrial companies - steel, machinery and aerospace defense. Such industrial companies, he said, have been undervalued, underowned and "ignored by the market."
Among the Smith holdings for the period were Cray Research and Rohr Inc.
"We think a lot of the smaller undervalued stocks haven't done well yet and many of the things we see happening, including the weakness of the dollar should benefit and help industrial America," said Mr. Smith.
PIPER is compiled by RogersCasey, Darien, Conn.