From the April 2007 issue of Investment Advisor • Subscribe!

Par Excellence

The winners of our annual separately managed accounts awards typify excellence in investing, client service, and customization

While there are some 5,000 separately managed account products in the market, not all are "considered legitimate SMA management firms for managing an advisor's client capital," according to Prima Capital Holding President J. Gibson Watson III. "Of this universe, Prima estimates that there are about 1,400-1,500 SMA products managed by 600-700 firms that are suitable for high-net-worth investors," according to Watson. Even whittled down to a mere 1,500 accounts, the task of sifting through all that's available to find the best can be daunting.

To give advisors a head start on that heavy lifting, Standard & Poor's, Prima Capital, and Investment Advisor have teamed up for the third year to find the most outstanding separate accounts and their managers, and recognize them with the 2007 Separately Managed Accounts Awards. Prima Capital's Senior Analyst Nathan Behan and a Denver-based team of investment analysts culled through scads of data in the S&P/Prima Capital SMA Evaluator (available at www.primacapital.com), to select nominees, all of which had assets of $200 million or more, lead-manager tenure of three years or more, are widely available through retail programs, and rank above average in at least four of five SMA Evaluator categories.

A committee including Philip Edwards, managing director of Standard & Poor's Investment Advisory Services; Prima Capital Holding President Watson; IA Editor-in-Chief Jamie Green, and IA Senior Editor Kathleen McBride selected the award winners with the assistance of Prima's insightful analysts.

This year there are seven winners in six categories. For the second year in a row, Appleton Partners wins for best Fixed-Income account, and KCM Investment Advisors wins in the Tax Efficiency category with its Large-Cap GARP Equity account; for the third year, Thornburg Investment Management wins in the Large-Cap U.S. Equity category, with its Thornburg Value Equity account. The Large-Cap category has another winner, TCW Investment Management for its Relative Value Large Cap portfolio. Insight Capital Research and Management's Small Cap Growth product is the winner in the Small-Cap U.S. Equity category; Geneva Capital Management's Mid Cap Equity wins in the Mid-Cap U.S. Equity group; and in International Equity, this year's winner is AllianceBernstein's International Value ADR.

More Assets, Wider Availability

Assets under management in SMAs grew to $805.8 billion, up 24.8% year over year, at the end of the third quarter of 2006, the latest data available, according to the Money Management Institute (MMI), which estimates that those assets were stashed in 2.52 million accounts. MMI expects separate account AUM to top $1 trillion by 2009 and $1.5 trillion by 2011. According to Cerulli, which breaks out assets invested via platforms versus those brought to a separate account manager directly by an advisor, the average separate account via a platform in 2006 was $334,000, but there were an average of three allocations per client, so the average represents in reality a $1 million client relationship. The average for assets brought directly to the SMA manager was $1.183 million.

Part of the rapid expansion of SMAs available to advisors can be attributed to the popularity of "overlay managers, which provide even more efficiency to the trading so you don't have one manager selling IBM while another manager is buying it," says S&P's Edwards. That's a catalyst for growth, he says, and also allows consolidation of "something as seemingly minor as account statements," but which is a major convenience to clients. There's more access to SMAs, he says, because of platforms like Lockwood Investments, which offers the accounts "over their platforms, and I do think that gives independents access almost on an equal footing with the wirehouses."

The fee structure is changing for managers along with the platform structure. The advent of model portfolios is changing the operations structure of the SMA market, making the cost lower to investors but squeezing fees earned by the managers who participate. Still, there has been "fairly steady adoption of model-based, multi-manager programs by sponsor firms," Prima's Watson explains. It is "somewhat of a departure from a traditional SMA platform, because rather than manage individual sleeves in the portfolio, the manager submits his portfolio holdings to a sponsor or to an overlay portfolio manager to facilitate trading across the sleeves of the portfolio or across the different accounts." Along with outsourcing trading and operations, SMA managers are outsourcing the one-on-one contracts they have directly with advisors and clients to omnibus contracts with the platforms. That eliminates a lot of administrative work, but it also contributes to margin pressure on separate account managers who have had to cut their fees accordingly. "It tends to be a somewhat more tax-efficient, lower cost, more consolidated reporting type of experience for the client, yet not all managers are willing to participate in these types of programs," notes Watson. "They de facto are giving up their intellectual property, giving up these portfolio holdings for that third party to trade on their behalf, and they're giving up a lot of that back-office responsibility. Depending on the [type of] business that they're in, the managers may not be willing to sacrifice that intellectual property," says Watson.

If a manager generates alpha by "making asset allocation decisions, sector selection decisions, individual security selections, or based upon their trading or market timing--if you're giving up your trading or market timing abilities to a third-party firm--plus you're giving up your securities selection, or at least making it public," Watson asks, "do you risk giving up your ability to add alpha in your portfolio?"

Our winners, however, have sidestepped that pitfall and others, exemplifying excellence as measured by high, consistent returns, strong levels of customer service and customization, and widespread availability. Here are individual profiles of this year's SMA Awards winners.

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Large-Cap U.S. Equity

Thornburg Investment Management

Thornburg Value Equity


Thornburg Investment Management Value Equity

Phone: 800-847-0200

Web Site: www.thornburg.com

Manager: Team

Standard: Minimum Investment $25 million

Product Assets: $8.2 billion

Benchmark: S&P 500

1-year return vs benchmark: 22.76% vs 15.80%

5-year return vs benchmark: 9.06% vs 6.19%


Separating equities into basic value stocks, consistent earners, and emerging franchises has always been the modus operandi of Bill Fries and the investment management team of Thornburg Value Equity, and in 2006, this strategy scored them several winners, including the stocks of Las Vegas Sands, a casino operator in the U.S. that is making good with its investments in Macao.

The team also invested in the shares of satellite television operator DirecTV. "We thought it was a consistent earner because of the nice monthly checks the company gets from its customers, which provide a steady revenue stream," says Connor Brown, co-portfolio manager of the value equity product, who together with Ed Moran, was promoted to this position last February. "We don't hold it anymore, though, because it hit our price target."

A core part of the Thornburg approach is to buy stocks when they are out of favor, says Bill Fries, who has headed the value equity strategy since its inception in 1995. He gives as an example the retail pharmacy chain Rite Aid, which was never a hot market favorite because it has always had a much smaller market capitalization than rival pharmacy giants Walgreens and CVS. In 2006, though, Rite Aid acquired a couple of Canadian pharmacy chains, a move that has given the chain almost as many stores as its larger competitors and increased its attractiveness to investors.

A large part of Thornburg's success in this area is keeping client portfolios sharply focused. "We have less than 50 names in our SMA strategy, and we believe that having a limited number of names that we know well is key to our success," Brown says.

"Each of us is a global generalist," he says. "We are looking at different stocks and industries all over the world, so I feel we get a better perspective on things than other shops were analysts are more specifically oriented."

There are 10 investment professionals in the Thornburg Value Equity product and they manage around $8 billion in both institutional and individual accounts.--Savita Iyer

TCW Investment Management

Relative Value Large Cap


TCW Investment Management Relative Value Large Cap

Phone: 800-677-9727

Web Site: www.tcw.com

Manager: Diane Jaffee

Standard Minimum Investment: $5 million

Product Assets: $14 billion

Benchmark: S&P 500

1-year return vs benchmark: 19.90% vs 15.80%

5-year return vs benchmark: 12.30% vs 6.19%


Diane Jaffee, who manages $14 billion in relative value large-cap stocks for TCW, invests using the motto "searching for value, poised for growth." As such, she is not only looking for relative value in equities, but also seeking a fundamental catalyst to unlock that value, and drive strong cash flow for a company.

Jaffee, who has been with TCW since 1995, has three criteria for unearthing those catalysts.

First, she looks for restructuring or cost-cutting measures. Second, she looks to see whether a company is launching a new product or entering a new market, the success of which could contribute to top-line growth. Finally, the presence of a new management team--a new CFO, for instance--with different ideas on how to move a company forward, also can spur cash flow.

"We're first identifying value and then the fundamental catalyst that will make the stock attractively valued and poised for growth," Jaffee says. TCW has six analysts dedicated to this strategy, several of whom have significant investment experience.

Jaffee also prides herself on portfolio construction, which is done with the goal of minimizing three important risks: market, or specific risk; individual stock risk; and sector risk. "There have been lots of historical and statistical studies that show that if you have a large-cap portfolio of 26 names or more, you minimize 95% of your specific risk," she says.

Jaffee also builds channels around sector weights in her portfolios, and the maximum initial position on any stock she includes is 1%. Only as she gains conviction that the stock indeed is doing what she wants it to will Jaffee increase that allocation to between 3% and 4%, and she will automatically start scaling out as soon as any stock appreciates by 5% above market, because "we do not want the tail to be wagging the dog."

But Jaffee places the greatest importance upon the relationship she has with her clients. "I do believe that clients come first, and I think that the better you know your clients, the better your results will be for them," she says. "I or members of my team are in close contact with our clients."--Savita Iyer

Small-Cap U.S. Equity

Insight Capital Research and Management

Small Cap Growth


Insight Capital Research and Management Small Cap Growth

Phone: 800-878-8863

Web Site: www.icrm.com

Manager: Team

Standard Minimum Investment: $100,000

Product Assets: $249.8 million

Benchmark: Russell 2000 Growth

1-year return vs benchmark: 19.01% vs 13.34%

5-year return vs benchmark: 20.42% vs 6.92%


With small cap, whether you are looking at separate accounts or mutual funds, it can be frustrating to see a portfolio that looks interesting, only to find it closed to new investors. Fortunately, the winner for small caps this year, Insight Capital's Small Cap Growth, has room to grow. With $590 million in assets in the portfolio as of December 31, the managers estimate that it can double to $1.2 billion in assets before reaching capacity.

Insight's team manages the portfolio using fundamental analysis along with quantitative screens. Another characteristic that sets the portfolio apart is that the team does not always overweight traditional growth sectors like IT and healthcare.

Portfolio Managers Lee Molendyk and Lance Swanson, both vice presidents based at the firm's Walnut Creek, California headquarters, run the portfolio with a three-step investment process that's quantitative and qualitative. The investment process is "very bottoms-up, fundamentally driven, but we do start with a quantitative screening process as our way to weed out some non-performing stocks," according to Molendyk. They look for "high-alpha, low-standard-deviation stocks as indicators of potentially positive fundamentals." Starting with "all the stocks that publicly trade," in the U.S. at more than $2, about 6,500 companies, they "sort those every night with a proprietary tool," whittling the universe down to about 400 small-cap companies.

The team spends most of its time on the fundamental analysis of the remaining 400 stocks, looking for "well-managed growth companies [with] sustainable sales and earnings growth," Swanson explains, and market leaders.

Once a stock makes it onto the buy list, he says the team watches "its price performance, making sure as news and data comes out it is as expected and the stock reacts positively to it." Typically, the managers hold around 40 "relatively concentrated positions," ranging from 2% and 4%, and they never buy over a 5% weight in the portfolio. "Being that concentrated, weights can move around rather quickly,'' Molendyk reports, "so we find ourselves trimming quite a bit, and putting those [assets] into new names." That trimming can lead to relatively high turnover, on average around 200% per year. As for customization, as Molendyk puts it, "we have strategies for clients with strict cash control restrictions, sector restrictions, we even have a socially responsible client; we can tailor it to whatever a client needs."--Kathleen M. McBride

Mid-Cap U.S. Equity

Geneva Capital Management

Mid Cap Equity


Geneva Capital Management Mid Cap Equity

Phone: 414-224-6002

Web Site: www.gcmltd.com

Manager: Team

Standard Minimum Investment: $1 million

Product Assets: $1.1 billion

Benchmark: Russell Midcap Growth

1-year return vs benchmark: 5.66% vs 10.66%

5-year return vs benchmark: 10.01% vs 8.21%


With long-term performance that's better than average, low volatility, a high degree of tax efficiency--partly because of low turnover of about 20%--and relatively wide availability to investors, Geneva wins the SMA Award for Mid-Cap Equity. Co-presidents William Priebe and Amy Croen, along with Michelle Picard, VP, and W. Scott Priebe, investment analyst, make up the portfolio management team.

"We always have been attracted to companies in this size because they are, in our opinion, in the sweet spot of the growth cycle: plenty of growth ahead of them, managements that are focused, and yet companies that are past the riskier, entrepreneurial stage," says Croen. The team uses "bottoms-up fundamental analysis," but they temper that with periodic top-down investment outlook reports that they share with clients. That discipline "forces us to stand back and think about what's going on in the economy, in the investment outlook; for example--we might see 50 years of P/Es in that piece, it certainly helped us in the tech bubble, and then the bursting of the bubble, where we would compare that time period to previous bubbles like the Nifty Fifty."

"What we're looking for are companies that have a proven and consistent record of growth," according to Picard. "We don't want a younger company that looks like it's going to explode out of the chute, or a company that's cyclical that's going to have one or two great years of performance, but rather for those companies where we can look back and see that they've had consistent revenue and earnings-per-share growth that's been above average over a period of at least three to five years." They look for industry leaders with a "sustainable advantage" and experienced, focused management, and "at least 15% earnings-per-share growth, both historical and projected." Over the past five years, the companies in the portfolio did even better; they "have grown an average of 31% per year."

Though there are times when mid-cap portfolios might think about closing, capacity is not an issue right now for Geneva: the portfolio could comfortably triple to more than $3 billion. As Croen explains, "We actually did take a more structured look at liquidity issues and that's how we came up with the figure [tripling in size] in terms of amounts of shares that we would own of a particular company, and the number of days that it would take to either buy or sell a particular holding."--Kathleen M. McBride

International Equity

AllianceBernstein

International Value ADR


AllianceBernstein International Value ADR

Phone: 212 969-1000

Web Site: www.alliancebernstein.com

Manager: Team

Standard Minimum Investment: $1 million

Product Assets: $21.9 billion

Benchmark: MSCI EAFE

1-year return vs benchmark: 32.43% vs 26.86%

5-year return vs benchmark: 21.70% vs 15.43%


When the U.K. government passed a ban on smoking in pubs, investors in the British pub sector immediately assumed this would herald a major slump in the business. But Eric Franco and his team, who manage the International ADR effort for AllianceBernstein, were not convinced. The team commissioned a special survey on the British pub industry, which indicated that the smoking ban would actually result in increased business for pubs. "We found out that smokers are dedicated bar goers and even if they cannot smoke indoors, they will still go to the pubs and step outside for a cigarette," Franco says. "Others who used to go to pubs but not eat because they were surrounded by smoke, said they will now be going and also eating there."

This bent toward getting a deeper insight into market trends is what, Franco believes, sets AllianceBernstein apart, and often leads to the firm taking contrarian decisions and sticking with stocks that others are shunning. Last year, for instance, when most investors believed steel stocks would suffer as a result of mass capacity in China swamping the markets and driving prices down, Franco and his colleagues chose to retain their steel holdings.

"We thought there would be a price fall, but our research showed that it would be more moderate than what others believed," he says. "We were right and now, the global steel industry is really benefiting from consolidation."

Franco says he tends to be reactive to what other people are afraid of, more so because the international ADR portfolio holds stocks for a minimum three years, so "the stock is bound to come back to normal at some point," he says.

As in all other business areas of AllianceBernstein, the $6 billion international ADR effort bases its decisions upon the firm's research, which serves as the backbone and guiding philosophy of its investment strategy. The firm's analysts develop both quantitative research models and industry-wide qualitative research to forecast the long-term earnings potential of specific stocks. AllianceBernstein makes a point of hiring analysts with solid industry experience, Franco says, people who are veterans of the particular industry they cover and therefore know it inside out.

As far as international investing goes, Franco benefits from the global location of AllianceBernstein analysts. While this poses a minor drawback in terms of having to coordinate conference calls at odd hours for one party or another, the fact that there are analysts in New York, London, Tokyo, Hong Kong, and Sydney makes for a truly global and comprehensive research effort, Franco says.--Savita Iyer

Fixed-Income

Appleton Partners

Tax Exempt Municipal


Appleton Partners Tax-Exempt Municipal

Phone: 617 338-0700

Web Site: www.appletonpartners.com

Manager: Team

Standard Minimum Investment: $1 million

Product Assets: $1.4 billion

Benchmark: Lehman Blended 5-7-10 Yr. Muni.

1-year return vs benchmark: 3.92% vs 4.01%

5-year return vs benchmark: 4.85% vs 4.80%


One of the characteristics of the best investment managers is the ability to consistently perform well in all kinds of markets. In 2006, the bond markets faced special challenges, with an inverted Treasury yield curve, flat municipal yield curve, and "structured vehicles taking up municipal product," says Bonnie Tracy, senior VP at Boston-based Appleton Partners. "It's been much more difficult to find value in the market," in 2006. Difficult or not, the portfolio managers at Appleton Partners were able to "find value by more specifically targeting duration," and that helped them win top honors for Fixed Income for the second year in a row.

Nathan Behan, senior investment analyst at Prima Capital, explains that when it comes to managing portfolios of fixed income, "qualitative analysis ends up being the most important part," but he argues that it is difficult to rank managers in fixed income, where "100 basis points separate the top 10 firms from the bottom 25."

One big advantage Appleton Partners has is its relative size, managing $2.2 billion overall, with nearly 90% of that in the intermediate municipal portfolio, according to Douglas Chamberlain, president, CEO, and co-founder of the firm. "Appleton can make big block trades and add value" with that kind of scale, says Behan. That "helps on the buying side," and if they decide to sell a bond rather than let it mature.

Not that selling a municipal security happens very often at Appleton: according to Chamberlain, while the portfolios are actively managed, it's not from the standpoint of lots of trading; turnover is about 25% to 30%. Rather, the managers take an "active management, personalized" approach, he notes, adding value through "the way the portfolios are designed and structured, in-depth credit analysis, duration optimized around the yield curve, and security selection" that exploits the special market anomalies that matter for municipal securities. Low turnover at Appleton Partners is not limited to the portfolios, either, it's low for personnel as well; in its 20 years of operation, just two portfolio managers have left the firm.

Portfolio minimums are $1 million for direct accounts, or $500,000 through all but one platform, and these minimums allow portfolios to be customized according to a client's needs for duration, cash flow, liquidity, and where they live. Portfolios are diversified, including municipal securities from across the U.S., but customized with 40% to 60% in municipals from the client's state of residence, depending on that client's state and local tax situation. No municipals that would be subject to the alternative minimum tax are used. Currently the average coupon in the core portfolio is 5.15%, with a current yield of 4.8%, and a 5-year duration. The quality of the securities in the current portfolio averages AAA, and that is what Chamberlain calls clients' "rest-well money."--Kathleen M. McBride

Tax Efficiency

KCM Investment Advisors

Large-Cap GARP Equity


KCM Investment Advisors Large-Cap GARP Equity

Phone: 415 461-7788

Web Site: www.kcmadvisors.com

Manager: Team

Standard Minimum Investment: $650,000

Product Assets: $879.4 million

Benchmark: S&P 500 Citigroup Growth

1-year return vs benchmark: 6.47% vs 10.99%

5-year return vs benchmark: 6.90% vs 1.88%


A manager of a tax-efficient investment product should be focused above all on, well, tax efficiency. In order to meet that goal, Jay Kellett, founder and CEO of KCM Investment Advisors, believes the best thing clients in his Large-Cap GARP Equity portfolios can do is to pay their taxes now.

"Tax rates on dividends are as low as they have ever been, and tax rates on capital gains may well be going higher because of political changes," Kellett says. "Eventually, you're going to have to pay those taxes, so if you are going to pick a time, you might as well do it now." For Kellett and his team, tax is and always will be a forethought. It forms the core of an ongoing dialogue, not just between clients and their managers, but also between the managers and their clients' tax attorneys and accountants.

But while endeavoring to be as tax efficient as possible, Kellett et al. also abide by strict investment discipline, following a top-down approach to zeroing in on the market sectors they deem ripe for investment. Individual stocks are chosen through using both fundamental analysis and proprietary quantitative analytics, and narrowed down to those that present both intrinsic value and "growth at a reasonable price" (GARP) characteristics. Each portfolio is constructed with a particular client's tax situation in mind.

In addition to giving paramount importance to tax, remaining diversified and harvesting losses for clients, Kellett places great importance on the experience of his team. All the portfolio managers at KCM have been in the investment industry for decades, and they are professionals who have risen to the top of their field, he says. The track record of the team continues to attract new clients, and KCM continues to grow. The firm moved last year from Greenbrae, California to the city of San Rafael in the same state, doubling its office space, Kellett says.

KCM manages around $2.1 billion in the large-cap space. Kellett founded the firm in 1996 and he now employs seven portfolio managers, all of whom maintain regular contact with their clients. Indeed, "in addition to proactively customizing portfolios for clients, we constantly encourage direct communication with the portfolio managers," Kellett says.--Savita Iyer

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