In the year of the stock-pickers, Croft-Leominster was Maryland's best

January 30, 1994|By David Conn | David Conn,CDA/CADENCEStaff Writer

Last year was not the year for market timers. Longtime bears remained in hibernation in 1993. It was a lousy year for Fed watchers, macro-economists, technical analysts, quantitative analysts and even those who predict the stock market by studying chicken entrails.

Instead, last year was the year for stock-pickers, those with the skill and patience to unearth the gems. And of all the large institutional money managers in Maryland, no one did it better last year than Croft-Leominster Inc. of Baltimore.

Croft-Leominster's one-year rate of return on its stock portfolio was almost 26 percent, according to CDA/Cadence, a Rockville-based provider of investment performance measurement services. That was almost twice the return of the Dow Jones Industrial Average, and more than 3 1/2 times better than the Standard & Poor's 500 stock index.

Most of the dozen or so institutional money managers in Maryland that CDA tracks outperformed the broader markets last year. Although several, such as T. Rowe Price Associates Inc. and Legg Mason Inc., manage publicly traded mutual funds as well as private accounts, most tend to serve corporate clients, foundations and wealthy individuals.

But their investing skills ultimately affect a much broader segment of the population, because they manage endowment funds of many of Baltimore's biggest charitable and cultural institutions, not to mention the pension plans of tens of thousands of employees.

"If you're working for a company in town . . . [or] to the extent that someone is a recipient of an endowment, you'd hope that your money is being managed with the right balance of risk and reward," said Ed Boyer, president of Portfolio Consultants Inc., a Baltimore company which helps clients find appropriate investment managers and track their performance.

For Croft-Leominster, a four-year-old company with more than $100 million in assets under management, that balance came from founder L. Gordon Croft's devotion to ferreting out relatively low-priced stocks, preferably those with hidden assets and strong cash flow, an approach he calls "value and partly contrarian."

"We're not market timers," insists Mr. Croft, 61, who managed pension, endowment and private clients' money at T. Rowe Price before he left in 1990. "We didn't do it playing the new-issues market, or the small caps."

Instead, "We're involved in stock selection," said Mr. Croft, who runs the firm with his son, Kent, the company's president.

Mr. Croft said he's sticking with some of the best performers from last year, including Citicorp, Owens-Corning, General Motors and Primerica (now called Travelers Corp.). Some new selections include Partners Re, a Bermuda-based reinsurance company, and Phillips N.V., the Dutch electronics company, whose Polygram unit alone is worth the current price of the parent company's stock, he pointed out.

Just as important as the selections are the decisions to sell, Mr. Croft insisted. His strategy is to dump the least favorite stock in the portfolio whenever he or his son find a new one worth buying. "That keeps the portfolio upgraded to our latest thinking, and it also makes us sell some things we may have some doubts about," he said.

Croft-Leominster's three-year rate of return, at 23.3 percent, placed it second behind Alex. Brown Inc.'s subsidiary Alex. Brown Investment Management, which produced a 27.6 percent three-year return, after a 19 percent gain last year.

Dorsey Brown, who heads the Alex. Brown unit that manages about $3 billion, says the company seeks overlooked and out-of-favor stocks that are going through important changes, preferably companies with a strong potential for earnings and cash flow, and with "unusually strong management skills."

With their equity investments, T. Rowe Price and Legg Masofinished in the middle of the pack.

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.

Also, the analysis of investment advisers with at least $100 million in assets only includes stock holdings. So the extent to which a company's assets are weighted toward fixed-income securities isn't reflected in the numbers.

That helps explain why Richard Fontaine Associates Inc. of Towson, which largely avoided the market last year, approached the top of the list anyway. "That's amazing," said Mr. Fontaine when he heard the rankings. "We're only 40 percent invested" in the stock market.

Another T. Rowe Price alumnus, Mr. Fontaine founded and managed the company's Capital Appreciation Fund before he left in 1990. "That's where I got my reputation," he says, "not getting killed in the '87 crash."

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