Street Wise: A grand entrance into the adviser marketplace

MDT Advisers Inc. is busting out of the box with an effort to bring its investment strategy to the financial-adviser marketplace.

Founded in 1991 to manage the profit-sharing plan assets for Cambridge, Mass., consulting firm Arthur D. Little, the asset management unit only recently started managing money for outside investors.

After the consulting firm’s February 2002 Chapter 11 bankruptcy-protection filing and the asset-management unit’s acquisition last August by San Francisco-based money manager Harris Bretall Sullivan & Smith LLC, MDT was free to mass-market its strategy.

Since October, MDT has parlayed its flagship all-cap-core strategy to create two mutual funds and gain top-tier placement on the separate-account platforms of New York wirehouses Salomon Smith Barney Inc. and UBS PaineWebber Inc.

Having liquidated most of the $1 billion it was managing in the Arthur D. Little retirement fund, MDT now has a total of $170 million under management through the new distribution channels.

But though its total assets under management may have shrunk, its performance history remains valid and significant.

From its September 1991 inception through the end of last year, the strategy produced a total return, net of fees, of 13.07%. This compares with a 9.7% return by the Standard & Poor’s 500 stock index over the same time period, and a 9.6% return by the Russell 3000 index.

Year-to-date through last Thursday, the strategy was up 5.61%, net of fees, while the Russell 3000 had risen 5.58%. The style, described as fundamental with a quantitative overlay, packages the top-rated stocks from the Russell 3000 universe on the basis of earnings-estimate momentum, long-term growth rates, and price-earnings and price-to-book ratios.

The portfolio, represented in the Optimum Q All Cap Core Fund (OQACX), holds 66 stocks. Because the Russell 3000 is reviewed daily, annual turnover typically is between 150% and 200%.

R. Schorr Berman, MDT’s president and chief investment officer, says individual market capitalizations are among the last things considered because “the process involves ranking securities.”

The portfolio is 67.5% large-cap-weighted, compared with the benchmark’s 70%. The 31.5% mid-cap allocation is overweight compared with the benchmark’s 23%.

And at 1%, its small-cap weighting is below the benchmark’s 7%. Value is at 54.6%, versus the index’s fifty-fifty value-growth split.

Nuveen’s clone

Nuveen Investments Inc. will launch the second version of the closed-end Nuveen Preferred and Convertible Income Fund (JPC).

The original fund, rolled out March 27 with $1.5 billion raised at the initial public offering, now trades at a 5.3% premium to its net asset value, with a share price that gained 1.3% through Thursday.

The next version of the fund, referred to internally at Chicago’s Nuveen as the “son of JPC,” will be more like its twin, holding true to the income objective and a total return bonus.

With 103 closed-end funds, including 21 launched during each of the past two years, Nuveen qualified as a closed-end fund factory.

And as might be expected, this latest cloning project is aimed precisely at current market conditions.

The strategy starts with a 60% allocation to preferred securities, a 30% allocation to convertible securities and a 10% allocation to high-yield bonds. The portfolio is also designed to be about 30% leveraged, according to Nuveen executive vice president Bill Adams, who says the product was created with the fixed-income investor in mind.

“The idea was to blend preferred and convertible securities as a way of providing income with some potential for total return,” Mr. Adams says. While the fund’s dividend income is being supported by the preferred and convertible securities, the total return kicks in through the performance of the underlying stock, making the convertible securities trade like a stock.

Questions, observations, stock tips? E-mail Jeff Benjamin at [email protected].