OC’s money managers, who had shied away from tech stocks in recent quarters, found themselves behind the curve in the second quarter, when the techs led a market upswing.
After many quarters of impressive returns, most money managers underperformed the major indices that they are benchmarked against.
“It seems as though what has performed well for the last several years (even outside of technology) has performed poorly as of late,” said Steve Borowski, managing partner at Newport Beach-based Metropolitan West Capital Management LLC. “Counter to that, what had performed poorly has recently done well,” he said.
Metropolitan West is the largest privately owned money manager in Orange County, with assets of more than $2.2 billion. The firm invests its clients’ money using the traditional value-investing approach. Metropolitan West’s Intrinsic Value Composite portfolio was up 2.65% in the first quarter, while the benchmark S & P; 500 gained 5.85%. Metropolitan West’s composite portfolio was down 6.3% for the six months ended June 30, compared to a decline of 6.69% for the S & P; 500. Still for the trailing 12-month period, the money manager outperformed the S & P; by a wide margin. Its portfolio is up 2.24% while the S & P; 500 is down 14.8%. The firm has outperformed its benchmarks in six out of the past eight years.
For the second quarter, Metropolitan West’s performance was better than other managers in the county. Newport Beach-based Street Asset Management, which in the fourth quarter was ranked No. 2 nationwide in Nelson’s U.S. Large-Cap Growth & Value Equity category, underperformed the S & P; 500. Its average return on the portfolio came in at 0.40% compared with the S & P;’s 5.85%.
“The second quarter was a rough one,” said Kurt Stabel, chief investment officer at Street Asset Management. “The month of April really hurt our overall performance for the quarter,” he said. “S & P; was up 7.68% and we were up only 2.3%.”
For the first six months, Street’s portfolios on an average were down by 2.2%, while for the 12-month period they have gained 9.8%.
Most money managers in OC, including Metropolitan West, shy away from technology stocks because they do not fit their style of investing. They normally invest in large capitalized stocks of companies.
But the tech sector bounced back sharply in the second quarter, pulling the S & P; 500 higher. Also, the small- and mid-cap stocks led the S & P; rally, while most managers here focus on stocks of large-cap companies.
“A lot of the S & P; 500 rise was driven by technology and small caps,” said Roger Palley, national director of value strategies for Wells Private Asset Management, who manages around $500 million. Also, “Small- and mid-caps did better than large-caps.”
Knightsbridge Asset Management LLC, another Newport Beach-based money manager, also saw its performance overshadowed by the S & P; 500.
The firm had an average gain in its portfolios of 2.6% for the second quarter.
“It was a bizarre quarter. The breadth was so good that people felt that they should have done good,” said John Prichard, portfolio manager at Knightsbridge.
Outperforming the stock market on a consistent basis is difficult and almost 90% of professional money managers underperform the broader indices.
“The market has been very difficult and there has really been no place to hide,” said Palley, who said his portfolios were up an average 4.4% in the second quarter. Palley benchmarks his performance against the S & P; Barra Value, which was up 4.41% in the quarter.
“We haven’t lost any money this quarter, this year and haven’t lost any money last year. And compared to a lot of things, that is very good,” said Palley.
Palley Needelman Asset Management Co. is another firm that did not lose money in the period. Its portfolio gained 3.73% for the quarter, while it gained 0.43% for the first six months. For the 12-moth period, its average portfolio rose 9.51%.
While most value money managers were overshadowed by broader indices, Irvine-based Affinity Investment Advisors Inc., a money management firm that uses core-style investing, had a 9.12% gain in its portfolios, outperforming the S & P; 500 by three and a half points.
A core style allocates investments to both growth and value stocks.
“Our performance shows that the benefits of core investing cannot be ignored,” said Stephen Moses, a partner at Affinity Investment. “This quarter and over the last 12 months our clients benefited from our conservative core style, which muted the markets’ recent volatility.”
Meanwhile, PIMCO’s Global Innovation Fund was up 14.66% in the quarter. The fund invests in global technology stocks and its rise corresponded with that of the Nasdaq Composite, which was up 17.40% for the period.
Despite the 15% gain, the Innovation fund was down 29% for the year and has lost 47% of its value over the past 12 months.
Meanwhile, fixed-income managers had difficulties in outperforming their benchmarks, as the market already had discounted the Fed’s interest-rate cuts well in advance.
PIMCO’s Total Return Bond Fund and Huntington Beach-based Allegiance Capital’s performances were near that of their benchmark, Lehman Government/Credit Index. But PIMCO’s Emerging Markets Bond fund was up 6% for the period. n
