Economy

Local money managers beat the Street in '05: But not by much; huge returns a distant memory

January 30, 2006

Put your money in value stocks. No, put it in a mix of value and growth stocks. No, go with value stocks and a peppering of mutual funds, just to be safe.

Gather Indianapolis' most prominent money managers in a room, and the advice would go something like that.

Yet while the city's highest-profile wealth handlers take wildly different approaches to investing, they agree on one point: The market posted a disappointing performance in 2005.

"It was a difficult year for anybody trying to manage money," said Ken Skarbeck, managing partner of Indianapolisbased Aldebaran Capital LLC. "It was a very non-volatile year, which didn't give many opportunities for buying things when they were being clobbered."

The overall market, as measured by S&P 500, rose only 3 percent in 2005, despite a strong economy and rising corporate profits. The index rose 8.99 percent in 2004 and 26.38 percent in 2003.

Despite the challenging market, Indianapolis-based Woodley Farra Manion Portfolio Management Inc. eked out an estimated 8.9-percent return for its clients, making it the top-performing money manager surveyed by IBJ. (The firm won't have its audited returns until the end of January.)

The firm encourages its 300 clients to focus on large-cap value stocks.

"We recommend as long as they are using high-quality stocks ... they put as much as they are comfortable with in those companies," principal Mike Manion said.

In 2005, that meant investing in energy, utility, defense and aerospace companies. It'll probably mean the same thing in 2006.

The firm has $395 million in assets under management and its average client has a $1 million portfolio.

Columbus-based Kirr Marbach, a value investment firm with $500 million under management, fared nearly as well, posting a return of about 8.1 percent for its stock accounts.

"Value has been a pretty good place to be," Chief Investment Officer Mark Foster said. "What we're trying to do is buy securities that are trading at a substantial discount to their intrinsic value."

The firm works with wealthy individuals and smaller pension plans. Roughly 10 percent of its assets are in its mutual fund, the Kirr Marbach Partners Value Fund, which returned around 7 percent in 2005.

Foster said the returns would have been better had the firm steered clients toward energy stocks. The sector, as measured by the S&P Energy index, returned nearly 30 percent.

"That was one group [of stocks] that worked pretty well," he said.

While Kirr Marbach enjoyed success in mutual funds, Sheaff Brock Investment Advisors avoids them.

The Indianapolis-based firm-which puts client assets in stocks, bonds and cash-returned about 4.75 percent. That didn't make for a "particularly good year," co-owner Dave Gilreath said, but the firm still has outperformed the overall market by 15 percentage points since opening four years ago.

The firm's average account is just shy of $400,000 and it manages $134 million in assets. It added 33 households in 2005, bringing its client base to just more than 225.

David Knall, who oversees billions of dollars in accounts on behalf of wealthy Indianapolis families, wouldn't disclose his 2005 returns.

"We've done extremely well," is all he would say.

Knall and his 30-person team last year jumped from Clevelandbased McDonald Investments to St. Louis-based Stifel Nicolaus & Co.

In 2005, he said, each of his clients' accounts looked similar: 15 percent to 20 percent of assets in oil and gas, 8 percent to 10 percent in cash, 8 percent to 10 percent in precious metals, and 30 percent in foreign investments. The rest was allocated to a "hodgepodge of stocks."

This year, he said, will be more of the same.

"We are going to continue the same allocation that we've had for the last 18 months or so," Knall said.

Money managers say returns may be in the same range, as well, as stocks continue to wear off the excesses of the 1990s bull market.

"We're looking for the markets to be similar in 2006," said Manion, echoing peers.
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