Street Wise – GE’s Contra Fund: Downside protection plus

Downside protection is becoming a powerful selling point at GE Private Asset Management in Sherman Oaks, Calif.

The company, which manages $2 billion of separate-account assets, is using an in-house mutual fund made up mostly of Standard & Poor’s 500 stock index put options that increase in value when the index falls, to help limit overall portfolio losses to 10%.

Its Contra Fund, registered with the Securities and Exchange Commission and subadvised by Credit Suisse Asset Management LLC in New York, can be purchased only through GE Private Asset Management. It does not yet have a ticker symbol.

The fund’s performance – up 91% in 2001 and approximately 85% so far this year – is due in large part to its makeup of put options, U.S. Treasury bills and various cash equivalents.

Despite the high performance in a down market, the company’s managing director, Rob Brown, insists that the fund is anything but a market-timing vehicle.

Developed at the end of 1998 to provide investors with some downside protection that doubles as a tax-efficient alternative to bonds, the Contra Fund now is being used in three-quarters of the portfolios being constructed by the GE Financial Assurance unit, which until March 15 was known as Centurion Capital Management.

Bethann Roberts, chairman and CEO, says the fund is designed to counterbalance equities after losses have reached 10%.

“Most people can only stomach a certain amount of downside, and 10% seems to be that pain threshold,” Ms. Roberts says. “The person willing to give up a bit on the upside for some benefit on the downside is the customer for Contra.”

The fund’s strategy has proved so powerful that a typical equity portfolio will have only about 5% allocated to the Contra Fund.

The impact of the Contra Fund on GE Private Asset’s core U.S. diversified equity portfolio reduced the loss over the first seven months of this year to 7.9%, from 16.9% without an allocation to the Contra strategy. The S&P 500, over the same period, lost 20%.

In 2001, the company’s equity portfolio with the Contra Fund gained 5.4%, while the S&P lost 11.9%.

In 2000, when the S&P lost 9.1%, the company’s portfolio including the Contra Fund gained 8%.

In 1999, the first full year of the Contra Fund and the last full year of a bull market for U.S. equities, the company’s portfolio gained 16.2%, while the S&P gained 21%.

back to basics

At a time when investors are trying to avoid companies with complex accounting and business models, it doesn’t get much more basic than Dime Community Bancshares Inc. (DCOM) in Brooklyn, N.Y.

The holding company for the Dime Savings Bank of Williamsburgh essentially is a balance of mortgages and deposits.

At its 19 branches in parts of Brooklyn, Queens, the Bronx and suburban Long Island, Dime Savings specializes in mortgage lending for multifamily housing, which equals about 80% of its mortgage portfolio.

On the liabilities side, it’s all about savings deposits, much as it was in 1864, when the bank’s first branch opened in the Williamsburg section of Brooklyn.

The bank, which went public under the holding company in 1996, has spent the past three years cutting its cost of funding by focusing on the quality and quantity of customer deposits.

According to Mike Devine, president and chief operating officer, the bank applied a micromarketing strategy that included direct-mail solicitation and teaser-rate incentives to people living in the neighborhoods around the bank branches.

The bank successfully converted deposits from certificates to savings accounts. That resulted in a rise to 58% savings deposits, from 42%. Average deposits per branch grew to $90 million, from $63 million three years ago.

The company’s stock, now trading at around $26.90 a share, has risen nearly 60% over the past 12 months, which compares with a decline of more than 16% by the Russell 2000 Index.

Questions, observations, stock tips? E-mail Jeff Benjamin at jbenjamin @crain.com.