Non-traditional strategies dominate in equity funds

Rally boosts first-quarter returns, but 12-month performance is disappointing

May 10, 2009 @ 12:01 am

By Rob Kozlowski

Equity managers overall got a boost at the end of the first quarter, thanks to the March rally, but the firms at the top of the performance charts for the 12-month period ended March 31 were those that followed non-traditional strategies, according to Morningstar Inc.'s database of separate accounts and collective investment trusts. Among all composite equity separate accounts listed by Morningstar, just two — Leuthold Weeden Capital Management LLC's Advant- Hedge and Federated Investors Inc.'s Alternative Bear Equity — had positive returns for the one-year period ended March 31. There was more of a pattern among the top 10 strategies in the first quarter than the previous quarter, according to Rachael Olson, an institutional analyst for Morningstar's separate-account/collective-investment-trust data services unit in Chicago. “Our top three funds are either shorting a significant percentage of their portfolio or able to utilize cash,” she said. Top-performing portfolios also tended to be very concentrated, Ms. Olson said. She cited Chinook Capital Management LLC's emerging-growth strategy, the top-performing value equity portfolio, and St. James Investment Co. LLC's core equity strategy, the third-ranked blend equity strategy, as examples. “Chinook Emerging Growth is a traditional small-growth product using bottom-up fundamental research, but it is rather concentrated. The St. James Core Equity only holds 15 to 25 stocks at any given point,” Ms. Olson said. Leuthold Weeden of Minneapolis had the top-performing overall equity portfolio for the second quarter in a row. Its AdvantHedge bear market short-only portfolio recorded the high gross return for the 12 months: 47.43%. In calendar year 2008, the portfolio recorded a return of 78.24%.
Although the portfolio was still the top manager, its drop in performance was due to one of the most challenging quarters that the manager has ever had, according to co-portfolio manager Greg Swenson. The portfolio uses a quantitative approach, identifying companies whose prices are expected to decline and selling those stocks short. It is restricted to short selling about 50 mid-cap to large-cap stocks. “The [first] quarter was kind of bookended by two extremely tough periods,” Mr. Swenson said. The portfolio experienced a downward slide from the end of November until Jan. 6. From then until the March 9 low of 6,547.05 for the Dow Jones Industrial Average, “we did really well; it was kind of like 2008 again,”Mr. Swenson said. After the low, “kind of what we felt [had] worked, didn't work from then until now,” he said. “We do feel like we've held our own; with those two time periods in the quarter, we probably underperformed about 7% [from] where we like to be. I still think the fund held up pretty well,” Mr. Swenson said. The median overall equity manager had a return of -36.92% for the 12-month period ended March 31; the Russell 3000 Index returned -38.2% during the same period. In second place was Pittsburgh-based Federated Investors' alternative bear market portfolio, with a one-year return of 30.11%. Federated shorts most of the portfolio but often takes long positions in securities linked to gold and other precious metals. The strategy also had the top five-year overall equity return in the separate-account universe, with 11.16%. In third place for the year was the large-cap blend Robinson Market Opportunity Composite strategy from San Antonio-based Robinson Value Management Ltd. It had a one-year return of -0.27%.

The portfolio spent most of the first quarter in cash, according to Charles Robinson, managing director at the firm and portfolio manager of the strategy.

“It was long until very early in the year. About the third or fourth day, it went to cash and stayed there until late February and ... it went just a little bit long in late February and then in mid-March it went short, just a little bit short,” Mr. Robinson said.

“It had no real strong opinions through the quarter. Either this thing is 140% long or 40% short, so a cash position is an in-between, where it usually doesn't stay,” Mr. Robinson said.

Portland, Ore.-based Chinook's emerging-growth portfolio had the fourth-best overall one-year return at -5.86%.

“Our process focuses on secular growth, so even when we have an economic downturn, our focus on secular growth helped a lot,” said portfolio manager Lantz Stringham. “Stock selection has been positive for us the last quarter and last year, with perhaps the exception of health care.”

Rounding out the top 10 for separate accounts were the Protected Index Program of PTI Securities & Futures LP of Chicago, with a one-year gross return of -6.71%; Fan Asset Management LLC of Mountain View, Calif., for its absolute capital-appreciation strategy (-9.1%); Dallas-based St. James' core equity strategy (-11.51%); Manley Asset Management LP of Chatham, N.J., and its small-cap-value strategy (-14.09%); American Century Investment Management Inc. of Kansas City, Mo., and its concentrated large-cap-growth strategy (-14.85%); and OMT Capital Management LLC of New York and its small-cap/mid-cap growth strategy (-15.58%).

For the five-year period ended March 31, Mandeville, La.-based Orleans Capital Management Corp.'s energy opportunities strategy, at 9.93%, was second, behind Federated's alternative bear market portfolio.

Rounding out the top five were Leuthold Weeden's AdvantHedge strategy at 9.42%, Eagle Global Advisors LLC of Houston for its master limited partnership composite strategy at 8.96% and Crescat Portfolio Management LLC of Denver for its large-cap composite strategy at 8.34%. All five-year returns are compound annualized.

The Russell 3000 returned an annualized -4.59% for the five-year period, while the median overall equity separate account in the Morningstar database returned -3.24%.

In the collective-investment-trust universe, Seattle-based Washington Capital Management's real estate equity strategy led the way with a one-year gross return of -11.91%. The strategy was also the leading strategy for the five years, with an annualized return of 9.46%.

The one-year and five-year median returns for the collective-investment-trust universe were -37.86% and -4.16%, respectively.

Rob Kozlowski is a reporter for sister publication Pensions & Investments.

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