Stock-picking, value-oriented approaches and fundamental analysis helped several money managers weather an uneasy second quarter, according to the Pensions & Investments Performance Evaluation Report.
Seven of the top 10 separately managed equity accounts for the quarter were value-oriented, and the fundamental analysis and bottom-up stock picking provided momentum for many of the top performers.
The Hedged Strategy composite managed by Husic Capital Management, San Francisco, returned 12.59% for the quarter, making it the top performer among separate equity funds for the period. The portfolio's 28.36% return made it fourth among all equity funds in one-year returns.
For overall commingled equity funds, Boston-based State Street Research & Management Co.'s Energy Fund topped the quarter, with a 11.7% return
The Energy-Public Traded Equity product from The Mitchell Group, Houston, was the top quarterly performer among managed value equity accounts at 10.92%. The Equity Income Fund managed by SunBank Capital Management, Orlando, Fla., led commingled value equity funds for the quarter with 4.55%.
The top quarterly performer for managed growth equity accounts was the Quality Growth composite from Combined Capital Management Inc., Charlottesville, Va., which returned 5.27%, making it fifth overall. Leading commingled growth equity funds for the same period, with a return of 2.61%, was a large-cap growth fund, Separate Account B, managed by Sentry Equity Services, Stevens Point, Wis.
The Mitchell Group's portfolio, which concentrates on energy stocks such as oil and gas producers and refineries, reflected the good performance of the sector as a whole, said Rodney B. Mitchell, the firm's president. There were consistent gains across the group with no single stock outshining the others, he said.
There were very few oil-related stocks that did not benefit from the rise in oil prices during the quarter, said Mr. Mitchell. The price of West Texas intermediate crude bottomed out at $13.90 a barrel in mid-February and has since risen to just less than $20. He added that the expectation is that oil prices will continue to rise.
"Thirteen-dollar (per barrel) oil does not work in the real world," said Mr. Mitchell. "There has been a growing recognition that the cushion of excess supply is very lean indeed and it's not adequate to permit major accidents or political disruptions."
The best one-year performer for overall managed equity accounts was the equity portfolio of F.X.C. Investors Corp. Glendale, N.Y., which posted a 66.40% return for the year. It was followed by the Small Cap Growth with Value portfolio from Kalmar Investments, Wilmington, Del., which was also the top one-year performer among growth funds, with 32.41%.
Leading overall commingled equity and value commingled equity funds for the year ended June 30 were two funds managed by The Boston Co. Institutional Investment, Boston. The firm's Mid Cap Equity Fund returned 28.28%, followed by 24.01 for it's Small Cap Equity Fund.
The top return for commingled growth equity funds for the same period was 12.15% for a small-cap equity fund managed by U.S. National Bank of Oregon/Qualivest Capital Management Inc., Portland, Ore.
The best one-year performer among managed value equity accounts was the Small Cap Value composite from Capital Technology Inc., Charlotte, N.C. At 24.83% return, it was sixth among all equity funds based on one-year returns.
F.X.C. struck gold with two energy stocks, Coastal Caribbean Oils and Minerals and Canada Southern Petroleum Ltd. The stock price of Coastal Caribbean, which holds oil and gas leases off the coast of Florida, has gone up by about 1,000% since the company first bought it for the portfolio three years ago, said Francis X. Curzio, president and chief executive officer. Florida has outlawed offshore drilling, but the company's rights in the Gulf of Mexico have been grandfathered, he said.
"We recommended it at 15 cents a share three years ago and everybody laughed at us," said Mr. Curzio. It is now at $1.38 and could increase, he said.
The stock of Canada Southern, which has one of the largest natural gas fields in North America, rose from $1.87 per share, when the firm bought the stock, to a peak of $8.25 in about three years and is now trading at about $5.25 per share, but is still recommended, said Mr. Curzio.
F.X.C. follows a value approach, seeking good fundamentals such as strong balance sheets with little or no debt, particularly in the speculative stocks. Those speculative positions are balanced by holdings including Exxon Corp., American Home Products Corp. and Bethlehem Steel Corp. preferred stock, which bring steady income, said Mr. Curzio.
The accounts were among 706 separately managed and 298 commingled equity accounts in the PIPER universe.
The overall median equity return for managed accounts was -1.1% for the second quarter and 3% for the year ended June 30. The median for commingled accounts for -0.8% for the quarter and 1.8% for the year. The Standard & Poor's 500 Stock Index returned 0.42% for the quarter and 1.41% for the year. The Russell 2000 Index returned -3.9% and 4.4% respectively for those periods. The International Equity portfolio of Draycott Partners Ltd., London, was the top performer for the quarter, returning 7.27%, while the International Equity fund of Lexington Management Corp., Saddle Brook, N.J. was first in one-year returns, with 59.23%.
By comparison, the PIPER international equity median return was 2% for the quarter and 21.1% for the year. For global equities, the median was 0.9% for the quarter and 16.4% for the year. The Morgan Stanley Capital International World Index returned 3.12% for the quarter and 10.78% for the year.
The Lexington product benefited from improvement in the Japanese and Mexican markets, said Richard Saler, portfolio manager.
The fund is 37% invested in the Japanese market, which seems poised to recover, said Mr. Saler. That expectation of recovery has helped cyclical stocks such as suppliers of parts and materials, he said.
One good performer is Hino Motors Ltd., a truck maker, which has done extremely well and is showing strong orders, said Mr. Saler. Its stock valuation is up about 42% in U.S. dollar terms since Lexington purchased it at the beginning of the year, he said.
Cyclical issues have also performed well in Europe, which is further along in its recovery, said Mr. Saler. But investing in Europe has become a game of finding cyclical stocks in which expectations have not already been built into the share prices, he said.
Another area performing well is South Africa, where Lexington's international product is invested 5% of its portfolio. The smooth transition to post-apartheid government has brought investors back, and the country also is benefiting from a commodity-driven economy at a time when commodity prices are rising. Mr. Saler said he particularly liked South African metals companies, such as Samancor, the world's dominant supplier of alloys used in making stainless steel. That company should benefit from Europe and Japan coming out of their recessions and requiring more materials.
"The South African market has been a good performer this year on the back of the fairly smooth transition to black rule. It has gone as well as everybody could have hoped for," said Mr. Saler.
The global equity product of Pictet International Management Ltd., London, was the top quarterly performer among global equity managers with 5%. Bee & Associates, Inc., Denver, topped the one-year returns with its global equity product, which returned 34.77%; it was also the top three-and five-year performer, with 27.17% and 19.95% respectively.
Bee & Associates Inc. concentrates on small-capitalization stocks with a bottom-up orientation, seeking undervalued companies with above-average growth, said Bruce Bee, president.
Bee is not invested in Japan, which hurt its performance in the second quarter, but it did take advantage of growth in Europe and in the Scandinavian countries in particular. Good performers included Benefon, a Finnish manufacturer of cellular telephones; and Algion, a Swedish manufacturer of antennas for cellular telephone systems.
The PIPER data was compiled by RogersCasey, Darien, Conn.