Value Managers Experience the Most PAIN in 2003

October 16, 2003 ( - An 840-basis point spread between the top- and bottom-performing strategies thus far in 2003 has placed value managers in a world of hurt among the measures of the PAIN indexes.

Of the five main investment strategies pursued by investment managers that maintain a value portfolio, the mid-cap value strategy performed best, returning 19.9% year to date. At the other end of the scale, the worst performing value strategy was dividend yield, which returned 11.5% so far through 2003.   The spread between the top and bottom performing strategies – 840 basis points – indicates the level of “pain” within the value style; the greater the performance difference among the strategy returns, the higher the pain, according to Blue Heron Consulting Group’s PAIN INDEXES and the returns for its Strategy Performance Indicators.

Thus, value managers positioned with a dividend yield bias were disadvantaged compared to their value peers over this time period simply because of their strategy bias.   Those with a mid-cap bias will have appeared to be more skillful.  

The equity style experiencing the next highest level of pain was growth, with a return spread of 616 basis points between the best- and worst-performing strategy.   Similar to their value brethren, of the four main growth strategies, the top-performing strategy was the mid-cap strategy, and growth managers pursuing this strategy returned 22.8%.   The bottom-performing growth strategy was consistent growth, which has returned 16.7% year to date.

On the other end of the spectrum, the equity style experiencing the lowest level of pain was the core style, with a spread of 498 basis points year to date.   In the core group, the top performing strategy has been the mid-cap strategy, with a return of 19.4% so far in 2003.   The bottom performing is the core-neutral strategy at 14.4%.  

“While the PAIN INDEX levels of 500 to 850 basis points may sound large, the first three quarters of 2003 have seen smaller than normal differences in strategy returns,” reported Nola Kulig, senior consultant. “We attribute this to the market’s preoccupation with macroeconomic and geopolitical events in the first quarter, and to strong market breadth during the second quarter rally.   Strategy return spreads, and the feeling of pain for managers practicing out-of-favor strategies, can be expected to increase.”