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Given the uncertainty across the investment and economic universe over the past year, it is no small feat for separately managed account (SMA) portfolio managers to continue delivering the alpha, great client service, and firm stability on which the best managers have built their reputations. As the winners of the 2008 Separately Managed Accounts Awards show, not only can this feat be achieved, but as four of this year’s SMA repeat winners demonstrate–including the four-time winners at Thornburg Value Equity–it is possible to do so consistently as well.

While separately managed accounts (SMAs) remain popular among institutions and the very wealthy, one industry trend noted last year that continues is the “steady drumbeat of adoption of models-based multi-manager programs,” according to Denver-based Prima Capital Holding President J. Gibson Watson III. In these programs, SMA managers “submit their portfolio holdings or portfolio models to a sponsor or an overlay portfolio manager,” so operational and administrative tasks are lifted from the portfolio manager’s shoulders and borne by the sponsor or overlay manager. In this subadvisory role, money managers license their “intellectual property” to the sponsor, Watson explains, receiving a lower fee than if they were directly managing the accounts, but leveraging their alpha-generating prowess to many more investors. According to Boston-based research firm Cerulli Associates, as of the second quarter of 2007 (the latest data available), the average subadvisory account size was $355,231, up from $334,427 in 2006; the average separate account relationship size rose to $1,101,216, from $1,003,282; and clients in subadvised accounts had a slightly higher average number of managers, too: 3.1, up from 3.0.

In the subadvised world, investors benefit from institutional-type money management, often at a much lower minimum account size, and as unified managed accounts (UMAs) grow in popularity, clients can see their entire portfolio on one statement. A UMA’s overlay manager can act as quarterback, coordinating holdings among account, asset, and security types, so there’s lower probability of overexposure to a company, or asset class, if, for instance, two separate account subadvisors or fund managers include the same holding in their models. For advisors with affluent but not ultra-high-net-worth clients, subadvisory programs can open the door to SMAs because account minimums are often lower for models-based programs. What’s “very interesting,” Watson reveals, is that “this whole migration to this unified managed account is really applying a product name to a service that has been provided by the independent RIA [registered investment advisor] for years.”

Investment Advisor has teamed up with Prima Capital for the fourth year to select the most distinguished separate accounts and their managers, and acknowledge them with the 2008 Separately Managed Accounts Awards. Prima Capital’s Director of Research Nathan Behan headed the team of analysts who did the heavy lifting, sifting quantitatively and qualitatively through thousands of separate accounts in Prima Capital’s PrimaGuide database, (available at, to arrive at a group of finalists for the awards. Each nominee was required to have: $200 million or more in assets; wide availability; lead manager tenure of three years or more; and above average performance in tax efficiency, performance, resources, and firm structure. With input from Prima’s analysts, a committee including Prima Capital Holding President Watson, IA Editorial Director James J. Green, and IA Senior Editor Kate McBride selected the winners.

This year there are six awards. For the Large-Cap category, there are two awards: for the fourth consecutive year, Thornburg Investment Management was selected; and for the first time, so was Congress Asset Management; for the third year in a row Appleton Partners takes top Fixed Income honors; for the second straight year Geneva Capital Management gets the Mid-Cap award; the International award goes to two-time winner Eagle Global Advisors; and first-time honoree C. S. McKee takes the Small-Cap Award.

2008 Large-Cap SMA Award Winners

Thornburg Investment Management


As the only separate account management team to win Large Cap honors in each of the four years since the SMA awards were inaugurated, Thornburg’s Large Value Equity portfolio’s managers, based in Santa Fe, New Mexico, continue their excellent track record of performance, client service, customization, and availability.

Keeping the number of companies in the portfolio at fewer than 50 allows the three co-portfolio managers of the $11.2 billion Thornburg Value Equity portfolio to focus their “bottom-up, fundamental” analysis on the “growth and value” companies that they believe are the most promising within the universe of U.S. domestic companies, according to Edward Maran, who is co-portfolio manager and managing director, as are Connor Browne and legendary investor William Fries, the founding portfolio manager for the separate account and the Thornburg Value Fund which is the model for the separate accounts. The managers use, Maran continues, “three baskets…basic value, consistent earners, and emerging franchises, and that gives our portfolio diversification which reduces risk, and allows us the opportunity to participate in any market.”

“Doing good work on the names–on the individual companies that we’re investing in–and only investing in a few of our very favorites is the best way to outperform over the long term,” says Browne. The portfolio has performed quite well. For the 10 years ended December 31, the portfolio’s total return was an annualized average of 10.93% versus 5.91% for the S&P 500, according to PrimaGuide.

“This is an ideal environment for fundamental, bottom-up analysis,” Maran explains, “share prices seem to be being driven by people that are either investing on large macro themes or some sort of quant models, and it’s creating some very severe distortions in prices that we’re able to identify because we do have a bottom-up, fundamental approach and we know our companies pretty well.”

Since January 2006, Fries, Browne, and Maran have been co-portfolio managers and all three have to agree on whatever they do with the portfolio. “We usually measure success in this business by total returns…but really risk-adjusted performance is more important, and one of the things that we get out of having three professionals as co-portfolio managers, especially the way we operate where we all have to agree before we take action, is that our risk management is better,” Fries notes.–Kathleen M. McBride

Congress Asset Management


Since 1985, Boston-based Congress Asset Management has been investing in large-cap companies that can consistently grow their earnings above average for a three- to five-year period.

“We’re not bothered about the next one or two quarters,” says Dan Lagan, chief investment officer for Congress, which has about $3.5 billion of its total $6 billion of assets under management in separate accounts. “We want to be comfortable with our holdings in the intermediate term, so we don’t worry about a stock having a bad quarter or two if we think it will do well in the long-term.”

In trying to build a portfolio that’s diversified (no more than 25% in any one sector, no more than 15% in any one industry, and no more than 5% in any one security) yet focused on best performance, the Congress team looks for companies with underlying fundamentals that set them apart from others. This requires thorough bottom-up analysis, but also some deep digging to unearth attributes that others might not have found, which could play out positively in the long-run. Lagan cites the example of chemical and agricultural products company Monsanto, one of Congress’s best large-cap performers last year. A company that “many believed to be nothing more than an old chemical name,” Monsanto was in fact extremely focused on extracting efficiency from its business model, Lagan says, which resulted in new product generation and great cash flow.

Congress is an independent, privately owned firm, “which allows us some flexibility in setting our goals and work environment as it relates to investing in our firm and people,” says Liz Sadwick, senior VP at the company. The company’s profit-sharing plan is invested in its balanced strategy, which uses the large-cap growth portfolio for its equity allocation, thereby aligning its employees’ objectives with those of its clients.

Congress’s approach is team-based, Lagan says, with the 15-member group meeting every week. “Being such a large team forces us to be consistent in our investment philosophy, regardless of the economic cycle,” he says.–Savita Iyer-Ahrestani

2008 International SMA Award Winner

Eagle Global Advisors


Steven Russo and Thomas Hunt, III, partners at Houston-based Eagle Global Advisors, credit a great deal of their success in international equity investing to their firm’s proprietary multi-factor analysis model.

Built by the firm’s professionals, the model incorporates growth, valuation, price momentum, and earnings revision metrics, and its output is used to identify candidates that warrant further in-depth financial and qualitative review. Beyond this, Eagle Global also uses fundamental analysis to assess individual companies—the quality of company management, their plans to maintain competitive advantages and increase shareholder value–and country risk, with the overall view to putting together a portfolio of around 40 to 55 high-quality, growth-oriented large-cap international stocks that are leaders in their field.

“We have been managing money this way for 10 years,” Russo says. “It’s a very easy and consistent way to do so.”

The strength of Eagle Global’s multi-factor model allows the firm to often go against the grain, investing in companies that other international investors might consider too risky. Turkish mobile phone operator Turkcell, for instance, was a company with a complex shareholder structure, while Turkey’s political situation at the beginning of last summer did not look too stable. Still, “we took it as an entry point and Turkcell has actually performed very well,” Hunt says. “Turkey has a great demographic profile in terms of the growth that is happening there and Turkcell’s underlying valuations were very attractive, trading at 9.5 times forward earnings when we bought the stock. The company has very high cash generation and its subscriber base is increasing.”

Hunt believes that the U.S. will be the “epicenter” of the impending economic recession, and that while the international markets will be affected and may no longer offer the high returns they have been producing over the past couple of years, they should continue to fare well. Eagle Global is now looking at markets like Taiwan and at infrastructure growth in China and India, which will continue to develop at a rapid rate.

Hunt, Russo, and the other founding partners of Eagle Global have been working together since 1992 and believe the collegiate atmosphere at the firm–which was set up in 1996–is another reason for its success.

“We are 100% employee-owned and we have never had an employee leave the team,” Russo says. “We developed our process ourselves and have been using it for decision-making since the inception of the firm.”–Savita Iyer-Ahrestani

2008 Mid-Cap SMA Award Winner

Geneva Capital Management


Bear, bull, or sideways–whatever the market environment, Milwaukee-based Geneva Capital Management LLC is one firm that, according to Michelle Picard, vice president, “sticks to its knitting.”

“We use the same investment discipline in any market,” Picard says. “In the mid-cap arena, we’re looking for companies that have a proven track record of growth, and have a leadership position and management that is looking at the long term, such that their companies can navigate these rather challenging economic times.”

Geneva Capital is largely a bottom-up investor, but the firm also incorporates some top-down fundamental analysis that focuses on more macroeconomic factors, to “shade” the portfolio, says Amy Croen, co-president of Geneva Capital.

“We have always liked mid-cap companies because even if they are in the riskier, more entrepreneurial phase, they still have growth to go,” Croen says. “We have always looked at companies with strong financials and low leverage–the kinds of companies that have not really been popular until recently. We also want these companies to have some kind of sustainable advantage to be ahead of their peers.”

The portfolio management team at Geneva Capital–Croen, Picard, co-president William Priebe, and investment analyst Scott Priebe–work very closely together. While other firms might boast of a “star” portfolio manager, the modus operandi at Geneva Capital is more egalitarian, with all four members of the management team getting an equal share of the portfolio to focus on.

“Each of us brings in three to four unique, high-quality names for approval every year. We all go to different conferences and have opportunities to see different sectors, so we cover far more ground,” Picard says. “We are on the ground a lot, too, spending time with company managements and doing a lot of due diligence work.”

Geneva Capital’s mid-cap portfolio typically features between 50 and 60 companies and management tries not to get caught up in the day-to-day machinations of their stocks. “We buy with a long-term horizon as we believe this gives us an advantage,” Croen says. “The key is finding companies that can weather the economic storm, so they need to have more financial flexibility and be in a better position to take on market share.”

Seventy-five percent of Geneva Capital’s $1.6 billion in assets under management is in separately managed accounts.–Savita Iyer-Ahrestani

2008 Fixed Income SMA Award Winner

Appleton Partners Inc.


This is the third consecutive Fixed Income Award for Appleton Partners, and it’s notable not only because of Appleton’s consistently high-quality performance, firm structure, and client service, but also because this award category includes both tax-exempt and taxable disciplines, so in each year it’s won, Appleton Tax-Exempt Municipal was selected from all of the fixed income SMAs. But what a difference a year makes: last year, finding value was difficult, and spreads were narrow; this year, the municipal market is newsworthy and there’s plenty of volatility, as bond insurers’ own ratings and liquidity are being questioned because of their involvement with insuring subprime and other structured securities.

Now, sellers are circulating lists of munis for sale–which are at times trading at fire-sale prices as sellers must raise cash–so there’s value to be had for those who understand the nuances of the esoteric and opaque municipal markets, and can “react to opportunities when they present themselves,” according to Anson Clough, VP, fixed income, portfolio manager, and senior analyst at Boston-based Appleton. Perhaps that underscores why it may never have been more important to have professionals managing the municipal portion of clients’ portfolios.

For many wealthy clients, the municipal bond allocation is one part of the portfolio that’s typically managed as “safe-haven money,” Clough says. A bond’s underlying creditworthiness outside any bond insurance is paramount. Clients “have other risky asset classes so we’re investing an average credit-quality portfolio of AA minimum…[and] with what was insurance in prior days–ending up with a AAA, on average, portfolio, with 5% to 10% in the A [-rated securities], and approximately 20% or so in AA.”

It’s hard to avoid owning bonds that have insurance–the value of which is debatable right now, because they were pervasive, making up “60% to 70% of the market,” Clough explains. “But the message to Appleton’s municipal clients has been, all along, that although the lion’s share of the municipal market is insured, we look through the insurance, and every bond that goes into an Appleton portfolio can stand on its own from a credit standpoint. Thus when we look through and strip away the insurance, the average credit quality in the portfolio only drops from a high AA+/lowAAA-, if there were such an animal, to an average of AA.”–Kathleen M. McBride

2008 Small-Cap SMA Award Winner

C.S. McKee LP


First-time winner C.S. McKee, based in Pittsburgh, uses “a team-style approach,” according to the Small Cap Domestic Equity portfolio’s lead manager, Phu O. Five portfolio managers comprise the team, each specializing in an industry sector. Starting with the companies in the Russell 2000 Index, the team uses quantitative fundamental, technical, and proprietary risk-assessment models to whittle the list to a more manageable 600 companies, including the best-scoring companies in each sector. Then the qualitative “due diligence” begins, O explains, with each sector specialist conducting in-depth fundamental analysis to come up with the best ideas in each sector to present to the team for consideration. The team currently invests only in companies with market cap of “under $2 billion,” says O.

The team has migrated during the last couple of years from a value bias to a growth bias, “because we think there’s going to be a reversion to the mean where growth will outperform value going forward,” O says, adding that “our quant model is sort of telling that as well.”

Most of C.S. McKee’s clients are institutions, but include a few institutional-sized individual investors. C. S. McKee does, however, participate in some models- based subadvised programs through a select group of banks. Assets under management through those subadvisory relationships totaled $529 million of the overall $8 billion under management as of December 31. For new accounts in the Small Cap portfolio, there is a $10 million minimum, though clients with larger accounts allocated across C. S. McKee’s different portfolios may have smaller allocations in the Small Cap portfolio.

One thorny issue for small-cap managers is that a portfolio’s very success can lead managers to close it to new investors well before a large-cap portfolio would have to close. With the Small Cap portfolio at $389 million in assets as of December 31, O notes that a “soft close” is probable at about $1 billion in assets because “the value that we add and the securities that we’re able to buy at the current size of the product–we capture that there.”–Kathleen M. McBride


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