Quantifiable success

Quantifiable success

Money managers by Jean Gruss | Editor/Lee-Collier

Moran Asset Management Group uses computer-run objective measures to find strong investments.

It's all in the numbers.

Naples-based Moran Asset Management Group approaches investing from a quantitative perspective, meaning it uses computers to dispassionately search for stocks.

The computer programs Moran Asset has developed to seek out stocks have worked well for investors, especially for shares of large companies. For example, its flagship moderate-growth portfolio returned an annualized 12.59% net of fees for the 10-year period ending Sept. 30. That's nearly four percentage points better than the benchmark Standard & Poor's 500-stock index, which returned 8.6% in that stretch.

The same moderate-growth portfolio also placed the firm in fifth place among 133 money managers specializing in large-company growth stocks over the 10 years ending March 31, according to tracking firm Nelson's Information.

It's these kinds of numbers that attract attention. The 22-person firm manages about $2 billion for wealthy individuals as part of the Wachovia Securities network. About $1.5 billion of that is in stock, with the remainder in bonds and cash.

Commission to fee-based

Initially, Moran Asset started out as a brokerage firm, earning commissions by buying and selling securities for clients. But founder Thomas Moran preferred managing money without having to worry about his clients' trading frequency.

So about 17 years ago, Moran and his partners switched to managing money for a flat fee, substituting potentially larger but more volatile commissions with more predictable fee revenues.

Initially, Moran Asset started managing money for wealthy clients through Prudential Financial. Then, three years ago, North Carolina banking giant Wachovia purchased Prudential and Moran now manages money for many of Wachovia Securities' high-net-worth individuals.

Moran Asset works with about 400 Wachovia Securities brokers who refer customers who have $1 million or more to invest. Moran charges an annual management fee of 0.5% to 1% annually, depending on the size of the account, to manage the clients' money. It splits the fee with Wachovia Securities, which clears its trades, and with the referring broker.

The firm then allocates the clients' money among 15 different stock portfolios and three bond portfolios, depending on the customers' appetite for risk. Stock portfolios range in investment style from the tame to the super-aggressive. Generally, Moran spreads customers' money across three to eight investment styles, which makes it unlikely that any single stock will make up more than 3% of their holdings.

Moran Asset currently manages money for about 1,000 clients with a median $2 million in assets. Each of the firm's four partners is responsible for 250 clients.

Robert Edwards, the company's senior vice president of investments, says he expects assets to grow by another $400 million this year. "It's really been Wachovia that's allowed it to expand," he says.

A 'quant' shop

"We're quantitatively driven," says Edwards, who developed the proprietary computer programs the firm uses to pick stocks.

For its moderate-growth portfolio, for example, the computer program sifts through 1,700 stocks using 52 criteria, such as sales growth, return on assets and return on equity. Each criterion is assigned a certain weight depending on its importance. In the case of this portfolio, a company's positive or negative earnings surprise gets top billing.

"If you have a surprise [earnings announcement], it tends to beget another," Edwards says. The firm buys or holds the stocks that rank in the top 360 and sell any stock that drops out. It's a purely numbers-driven process and the firm gives no consideration to subjective or emotional decisions.

Edwards is quick to point out that the program is not a screen. "We don't like screens," says Edwards. That's because screens cast out stocks that don't meet one or more criteria.

What if a chief executive mismanages the company? Edwards says that will show up in the numbers. For example, the firm sold its WorldCom shares after the stock posted substantial gains in the late 1990s and escaped the stock's subsequent meltdown after an accounting scandal sent WorldCom CEO Bernie Ebbers to prison.

The computer programs help them spot opportunities, too. For example, Moran Asset bought shares of Apple Computer over three years ago as it spotted its margins starting to expand. "We didn't understand what an iPod was," says Edwards, who since has spent hundreds of dollars for the popular digital-music player for his three children.

At the time, investors shunned Apple as a failing growth company and had punished the stock accordingly. "We could never find a time that Apple had been so cheap," Edwards recalls. So the firm started buying the stock at $12 a share. Today, the shares trade at $85.

"Today, no one understands why we bought Dell earlier this year," Edwards says with a grin. The firm paid $23 a share and it recently traded at about $26.

On the fixed-income side, Edwards says the firm builds Treasury bond ladders of staggered maturities in tax-deferred accounts such as IRAs and tax-free municipal bonds in taxable accounts.

Moran Asset doesn't charge customers a fee for managing bonds this way because Edwards says they're easy to construct and track. On occasion, the firm will buy closed-end funds, but only if they trade at a discount to the fund's net-asset value.

Private equity will dominate 2007

Robert Edwards has been successfully managing money for more than 20 years. As senior vice president of investments for Moran Asset Management Group in Naples, he says several trends are likely to influence the stock market in 2007.

Among the trends to watch in 2007:

• Private equity firms are going to buy more public companies. These firms have raised more than $300 billion, and if they leverage their deals that means they have $1 trillion to spend. "We think this is the dynamic driver for next year," Edwards says.

• Industries that appear to be undervalued include hospital chains, medical-device manufacturers, large pharmaceutical companies and media.

• Corporate cash flows are strong. Corporations are sitting on about $2 trillion in cash and they're going to return a good portion of that to investors, either in the form of dividends or share buybacks.

• International stocks may sputter. "We're encouraging people to reduce international holdings," Edwards says. International markets have risen substantially more than U.S. stock markets in the past two years.

• Small-company stocks aren't cheap anymore. Shares of small companies also have risen fast in the last several years and money is starting to flow away from them and into stocks of large companies.

• Energy stocks may have reached their peaks and Edwards says the firm will reduce energy related holdings on any spikes over the next year. "We're not in the early parts of the cycle," he says.

• Technology stocks may rise if Microsoft's new Vista operating system is successful. The last big cycle of technology spending occurred in the two-year period from 1998 to 2000. However, Edwards says 2008 may be a better year for technology stocks.

-Jean Gruss

Review summary

Company. Moran Asset Management Group, Naples

Business. Money management

Key. Picking stocks by analyzing the numbers can yield great results.