Street Wise: Bobbing and weaving leads to outperformance

With no restrictions in terms of market capitalization or sectors, Harry Rosenbluth has spent the past 18 months tilting his portfolio toward what he calls “higher-quality and higher-cap stocks.”

Mr. Rosenbluth manages the $2.4 billion Premium Equity strategy at Boston Partners Asset Management LP. It’s an institutional product with a $25 million minimum investment. (Also managed in identical fashion are a fund and managed accounts.)

Mr. Rosenbluth describes the equity market as “very flat,” with “no valuation mispricing between large and small companies.”

In such conditions, he says, with lower-quality stocks having enjoyed a significant run right alongside the more established companies, “the playbook” points toward quality and value.

With the exception of “second- and third-tier tech stocks,” which Mr. Rosenbluth describes as “the only group egregiously overpriced,” he says “everything else is sort of in the mushy middle.”

Mr. Rosenbluth makes his case by pointing to the 17.5 price-earnings ratio of the Standard & Poor’s 500 stock index.”We call this a flat market,” he says. “It’s not cheap, and it’s not overvalued.” That all amounts to the long version of why the portfolio’s weighted average market cap had ballooned to $19.6 billion by the end of last month, from $6.8 billion in June 2000.

The portfolio’s median market cap grew during the same period to $3.6 billion, from $900 million.

“The reason we got much smaller back in June of 2000 was that small-caps were ridiculously underpriced,” Mr. Rosenbluth says. “The situation has changed.”

Recognizing, and adjusting to, change is what has enabled him to outperform his benchmark Russell 3000 index consistently.

From the strategy’s inception at Boston Partners on June 1, 1995, through the end of this past September, the portfolio had generated an average annual return of 15.6%. This compares with a 10.2% return for the benchmark index.

Prior to the July 2002 launch of the Boston Partners All-Cap Value Fund (BPAVX), Mr. Rosenbluth’s investing strategy was restricted to institutions and wealthy individuals through separately managed accounts. Even though the mutual fund is managed in an identical fashion as the Boston Partners Premium-Equity product, it has attracted just $3.6 million so far.

Mr. Rosenbluth attributed the lack of investor interest in the mutual fund to the fact that it is still more than 18 months from qualifying for the crucial performance-based star ratings from Chicago-based fund tracker Morningstar Inc.

And since the track record of the more established portfolio can’t be applied to the more recently launched mutual fund, there hasn’t been much for Boston Partners to promote. “No ads and no stars,” Mr. Rosenbluth says of the fund’s inability to gather assets. Last Thursday the mutual fund was up 34% since its inception.

The portfolio of 100 stocks is positioned to take advantage of a market cycle that is well into its bullish run.

Consumer non-durables, for example, make up 14% of the portfolio, which is more than double the index’s weighting.

The sector is represented by a lot of brand name retailers, but Greenwich, Conn.-based smokeless-tobacco giant UST Inc. (UST) is the fund’s largest position at 3.4%.

The fund is also slightly overweight in the finance sector, at 31%, while the index’s weighting is 26%.

A closer look, however, reveals an allocation to the finance sector that is perhaps more unique than the weighting differential might suggest.

While the index’s finance weighting comprises nearly 40% bank stocks, Mr. Rosenbluth doesn’t own a single bank stock.

And insurance, which represents 40% of the index’s total finance weighting, is just 18% of the fund’s finance weighting.

The intent isn’t to underweight banks or insurers, Mr. Rosenbluth says; the weightings are based purely on bottom-up stock picking.

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