Last year was so tough on investors, wrote one securities firm research director, "that even the liars are telling you how much they're down on the year!"
That helps explain, if not ameliorate, the subpar results of most Maryland investment managers in 1994, as measured by Rockville-based CDA/Cadence, a division of CDA Investment Technologies Inc.
TTC The dozen or so money managers whose performance CDA tracked last year managed a 1.02 percent return, including stock dividends. That compares with a 1.3 percent gain by the Standard & Poor's 500 Stock Index. The average annual return of the stock market for most of this century has been about 11 percent.
To be sure, some still managed to beat the averages. The best in 1994 was Baltimore-based D. F. Dent & Co. Inc., with a 9.3 percent return. Dent, which manages about $500 million in assets, follows a growth strategy, seeking out companies with better-than-average prospects for earnings acceleration.
CDA's figures are based on only the equity portion of money managers' portfolios, plus the dividends paid by those stocks. So CDA ignores the skills investors use to allocate a mix of stocks, bonds and cash to achieve a total return for their clients. The CDA rankings reward stock pickers, pure and simple.
For Daniel F. Dent, president and a partner in D. F. Dent, picking growth stocks has taken on a whole new meaning in recent years. "We feel we are redefining growth in terms of moving away from what I would call the sunset growth stocks of the '80s," said Mr. Dent, whose partners are Sutherland C. Ellwood and Thomas F. O'Neil Jr.
Those stocks include pharmaceutical companies, packaged goods purveyors, retailers and the like, including Procter & Gamble, Colgate and Wal-Mart, among others.
"The world today has changed dramatically," Mr. Dent said. "Money is not being spent by consumers that have huge amounts of disposable income. Money is being spent [by companies] . . . on productivity- and efficiency-enhancing investments," and that spells technology stocks, such as computer and some communications firms.
Some of the obvious stars in that arena include Hewlett-Packard, Motorola and Intel, notwithstanding its Pentium chip problems. Ironically, D. F. Dent's single largest holding has been Fastenal, a distributor of nuts, bolts and other kinds of low-tech industrial fasteners.
CDA's numbers are based on the results turned in to the Securities and Exchange Commission by every company that manages at least $100 million in stocks. Some companies with fewer assets voluntarily submit the information in the SEC's 13(f) filings.
CDA calculates the rates of return by "freezing" a company's stock portfolio at the end of one quarter and determining how those stocks performed at the end of the next quarter. Any sales or purchases during a quarter aren't counted until the start of the next quarter. Only in rare cases would such "interim" transactions have more than a half-percentage point effect on a company's overall performance, according to CDA.
In second place last year was USF&G; Corp. with a 6.3 percent return. But that was mostly by chance, according to Chief Investment Officer John C. Sweeney. USF&G;'s $20 million or so of stocks are the remnants of an equity portfolio the company has been gradually liquidating in favor of fixed-income investments, he said. About half the remaining portfolio was IBM Corp., which did well last year.
The third-place performance came from Robert E. Torray & Co. in Bethesda, which managed a 4.6 percent return in 1994. Mr. Torray, who doesn't subscribe to Mr. Dent's view of what's hot and what will be soon, is a classic value investor, seeking out stocks he believes the market has undervalued, for one reason or another.
Two of Baltimore's public investment firms, Alex. Brown Inc. and Legg Mason Inc., trailed the pack last year. But Alex. Brown Investment Management, the company's primary money management affiliate, turned in the best five-year performance of all the firms, with an 89.2 percent return.
The equity investments in T. Rowe Price Associates Inc.'s mutual funds and private accounts returned 3.7 percent last year, or fifth place.
With last year's discouraging market, and no strong indications of a rebound, "Investors are at a critical point," said Ed Boyer, president of Portfolio Consultants Inc.
"If they're really long-term investors, they need to stick with the market," he explained. "It's obviously dangerous to focus on just one year," Mr. Boyer added. "So in all these cases I would focus on the three- and five-year numbers to see if it's a money manager you want to keep."
That's the view of Croft-Leominster Inc., the top performer in 1993, which dropped to 12th place last year, with a 1.8 percent loss. For the three-year period that ended Dec. 31, however, Croft-Leominster was the best among the Maryland investors, with a 57.6 percent performance.
"It's never a straight line up," said Croft-Leominster President Kent Croft. "For anybody who is in the market -- and we are long-term investors -- there are always going to be times when things aren't good."