Beverly Hills firm is top money manager during third quarter.

Beverly Hills firm is top money manager during third quarter

The No. 1 money manager in Southern California in the third quarter of 1990 was Beverly Hills-based Statistical Sciences Inc., which eked out a 3.50 percent gain on its "hedge" stock portfolio in the period, compared with a 13.72 percent decrease of the Standard & Poor's 500 index.

In a quarter in which equity managers were savaged, it is not surprising that the No. 2 performing manager was Santa Barbara-based STW Fixed Income Management Inc., a bond manager, and tied for the NO. 3 honors were the bond portfolios of West Los Angeles-based Campbell Reed Conner Birdwell and Orange County-based Winrich Capital Management, which each posted 1.40 percent gains.

Statistical Science used a stock hedge program to achieve its winning results, based upon buying 40 "good" stocks and selling short 40 "bad" stocks.

Selling "short" is the practice of borrowing a stock, selling it at current market price, and then buying it back at a lower price later for return to the original owner.

"We sell short a portfolio of 40 bad companies, and they feel more in value than the loss on our portfolio of 40 good companies," said Brad Ebner, vice president at Statistical Sciences. "The goal of our hedge program is make consistent returns of 13 percent to 15 percent a year."

A shortcoming of hedge programs is that in bull markets the losses on hedge positions drag down gains on the good stocks, admitted Ebner. But, he says, hedge strategies excel in a flat-to-declining market, such as the third quarter.

The quarterly survey of Southern California money managers is performed by Westlake Village offices of Prudential-Bache Securities Inc. The brokerage house groups money managers into four groups: equity managers; balanced managers (who invest in a mix of stocks, bonds and cash equivalents); fixed-income (bond) managers; and other managers.

The third quarter was a rough one for equity managers, said Robert Miller, pension plan consultant with Prudential-Bache.

"The S&P 500 was off nearly 14 percent, but it is weighted by the market value of the stocks in it. A broader gauge of the stock market, the Value Line geometrical average, fell 23 percent in the quarter," said Miller. "Although most managers are compared to the S&P 500, sometimes it is necessary to look at the broader indexes, to get a truer indication of the market that money managers operated in."

The stock market now awaits disposition of the Iraqi oil crisis situation, said Miller.

In addition to ranking managers by latest quarterly return, Prudential-Bache ranks managers by five-year returns and "return-to-risk," a method of relating the return in a manager's portfolio to the risk.

First place in the five-year return category, among all types of managers, goes to San Diego-based Brandes Investment Management, which earned a 27.06 percent annually compounded return on its portfolio of foreign securities.

The No. 2 manager for the five-year period ended Sept. 30 was West Los Angeles-based George D. Bjurman & Associates Inc., which posted a 19.32 percent annually compounded return. The third-best manager was San Diego-based Nicholas-Applegate, which posted an 18.84 percent annually compounded return on a portfolio of convertible bonds.

As a group in the five-year period, Southland money managers did not score particularly well when measured against market averages. Of the 38 equity and balanced managed accounts surveyed, only eight topped the 14.79 percent five-year annually compounded gain of the S&P 500. Numerous academic studies have found that money managers, as a group, are unable to beat market averages.

Prudential-Bache's third criterion for rating managers -- the measure of return-to-risk over the five-year period -- is a bit more complicated than simple total return.

Some portfolios have virtually no risk, such as those invested in short-term government bonds. There is little volatility, or risk, in the principal value of such a portfolio.

Of course, such a portfolio would have a smallish annual return of about 7 percent -- a modest reward, if little risk.

Other portfolios, such as small-capitalization, growth-stock funds, could have higher total returns, but are also subject to greater declines in value, as became manifest on Black Monday, Oct. 19, 1987. The same has been true recently for high-yield junk bond funds.

What is desired, of course, is a high ratio of return to risk, and that is measured by Prudential-Bache's reward-to-risk coefficient.

The top three managers by this criterion were downtown Los Angeles-based Chelsea Management Co., on its bond fund; STW Fixed Income, the bond manager; and downtown Los Angeles-based William Mason & Co., an equity manager.