The bear market finally mauled Orange County’s equity money managers in the first quarter.
After years of impressive returns, portfolios of equity money managers in Orange County, without an exception, had negative returns in the first quarter. And for yet another quarter, fixed income managers outperformed equity managers.
“Most of our accounts were down 2% to 3%” in the first quarter, said Lester Engebretson, president of Engebretson Capital Management Inc. or ECM. “Some of the portfolios were up 4% to 5% while some were down 4% to 5%, but on an average they were down 2% to 3%.” Figures for ECM were unaudited and ECM will not release the actual numbers till the audit is complete.
ECM’s portfolio continued its downward slide that started in the fourth quarter of last year. He said that last year was the first ever that his portfolios had negative returns.
“I am a guy who usually doesn’t get trapped in a loss year, but they got to me last year,” he said.
Engebretson has been managing money for more than 30 years and is among the few professionals who believe in timing the stock markets. For the first quarter, the savvy manager had put most of his funds in the money market.
A negative return of 2% is impressive considering that the Dow Jones Industrial Average declined by 8.05% and the S & P; 500 was down 11.83% in the quarter. The Nasdaq fell even more sharply, almost 20%.
“The markets turned very sharply in March and that even got us,” said Roger Palley, national director of value strategies for Wells Private Asset Management. Palley, who invests in equities using the value approach, said that he had dodged the bear market for most of 2000, a year in which his average portfolio gained more than 5%. His average portfolio declined by about 3.6% in the first quarter.
While money managers investing in stocks saw red ink in their portfolios, firms that specialize in investing in bonds had an impressive quarter.
Huntington Beach-based Allegiance Capital Inc., with $2.1 billion under management returned 3% in the first quarter. Allegiance invests its funds in high-grade debt only.
“We had a good quarter,” said Robert Southard, managing director at Allegiance. He said that during the period the returns on U.S. Treasuries and other government securities was 2.51%. Allegiance’s portfolio was up 14% in 2000, which topped gains made by equity managers in Orange County. Southard said the first quarter was the third straight in which bonds outperformed stocks.
But while Allegiance’s returns were impressive, considering the fact that they invest in high-grade bonds, Newport Beach-based PIMCO had the best performing bond instrument in the county. Its Emerging Market Bond Fund gained 4.67%. Its Total Return Fund, a $42 billion behemoth managed by William Gross, was up 2.86% in the same period.
In 2000, it was Nasdaq that went through its biggest correction ever. In the first quarter of this year, the S & P; 500 and the Dow Jones took big slides. Most of the money managers in Orange County invest in large capitalized stocks using the value investing approach,they buy stocks in companies with low price-to-earnings ratios, low price-to-book values and strong fundamentals.
Newport Beach-based Metropolitan West Capital Management LLC, the largest equity money manager in Orange County with around $2 billion under management, saw an 8.74% decline in its Intrinsic Value Equity portfolio. The firm invests in stocks using the old Graham and Dodd approach, one that helped it achieve a 10% return last year.
“The first quarter was not all that fun,” said Steven Borowski, managing partner at Metropolitan West. “Virtually no sector or industry was completely spared from the downturn last quarter.”
Metropolitan West’s Intrinsic Value Balanced fund did slightly better: down 4.8%. The firm’s International Value fund lost 10.44%.
Borowski said that the first-quarter trend was very obvious.
“There was a direct correlation last quarter between market cap and performance,in general, the smaller the company, the better it performed.”
Since Metropolitan West and other OC money managers focus on larger capitalized stocks, the trend went against them.
According to the Lipper Index of mutual fund performance in the first quarter, large-cap growth funds declined on an average by 22.06% while large-cap value funds were down 7.76%. On the other hand, small-cap growth funds declined 18.87%, while small-cap value funds actually gained 2.48%.
Corona del Mar-based Street Asset Management LLC, a start-up firm formed about a year ago by four industry professionals,Chriss Street, the namesake founder, Kurt Stabel, Raymond Pentz and Donald Sheetz,also had a negative quarter. For the fourth quarter, Street Asset came in at No. 2 in Nelson’s U.S. Large-Cap Growth & Value Equity category. Port Chester, N.Y.-based Nelson, a unit of Thomson Financial, ranked 125 money management firms and mutual funds in the category. Street Asset Management gave 8.59% returns to investors in the fourth quarter. But its Equity Composite portfolio lost 6.1% in the first quarter to give back almost all of the prior quarter’s gain. Street’s Balanced Composite portfolio, which invests in stocks and bonds did much better. It was down 2.6%.
Newport Beach-based Knightsbridge Asset Management LLC, founded two years ago by Alan Beimfohr, had a negative 6.4% return during the period. But the decline in the stock markets did not come in as a surprise to Beimfohr or other partners in the firm as they have been bearish on stocks for the past two years and had part of their portfolio in cash.
Portfolios of Knightsbridge, which invests in a broad segment of U.S. and international stocks, was up 12.4% in 2000. Knightsbridge also manages a small hedge fund, which had a negative 4.4% return.
While money managers using the value investing approach had a moderate decline compared to the major indices, many of the firms that invest in technology or growth stocks lost more.
Growth portfolios of Lake Forest-based WCM Investment Management, among the oldest money management firms in OC, were down almost 20% during this quarter.
“We were pretty much down in line with Bara Growth or Russel Growth, which is about 20%,” said Paul Black, principal at WCM. “Now that is huge by absolute standards but on a relative basis it is a good number.”
WCM’s growth portfolio declined some 6% in 2000, but was up 45% in 1999.
PIMCO’s Innovation fund, which has $2.8 billion under management, was the worst-performing fund. Investors who joined the fund on Jan. 1 saw their investments decline some 34.1% in the following three months. It was among the top performing technology funds in 1999 with a return of 139%, but lost 29% in 2000 and another 34% in the first quarter, meaning an investment of $100 on Jan 1, 1999, was at $110 after two years and one quarter, not even beating the money market rates. PIMCO Equity Advisors in New York manages PIMCO’s Innovation Fund.
Few investors could expect to blithely sail on in the face of the first quarter downturn in S & P; 500 and Dow Jones Industrial Average. But with the bounce back in stocks in April, most money managers say that they expect to recover their losses in the second quarter.
“We have recovered most of our loss this month,” said Borowski.
“We should do well this year,” said Engebretson.
Knightsbridge’s hedge fund gained some 8% in the first few weeks of April, said Beimfohr. n
