If you want to catch a glimpse of what the institutional investment world is like today, you need go no farther than 15th and G streets NW, where a crew of 50 people at ASB Capital Management watches over the fate of $5 billion.
Whose money is it? It belongs to a diverse collection of Washington area groups. ASB Capital's client list includes pension funds, endowments and trusts of many kinds. Among the clients are the International Brotherhood of Electrical Workers, Washington Gas Light Co., and the Boy Scouts National Capital Council.
ASB Capital Management, as its name implies, is a subsidiary of American Security Bank, long known for its large trust department.
Bank trust departments generally serve wealthy individuals or families and their estates. Investment strategies for those clients usually must be developed in the light of the fact that their accounts are taxable.
ASB Capital Management was created in June 1983 to attract new business from the nontaxable arena, particularly from pension plans.
Bank trust departments generally had a reputation as being "stodgy, uncreative and not particularly hard-working," said Terence W. Collins, the president of ASB Capital Management.
So American Security Bank decided to create a separate investment management operation, which began with $2.5 billion and has doubled in about four years.
Actually, the folks at ASB Capital were managing almost $5.9 billion in the era now known as B.C., or Before the Crash. (Anything that happened after Black Monday, Oct. 19, is called A.C., or After the Crash.)
By the end of October, the amount of money in the ASB Capital accounts had shrunk to about $5.6 billion, a loss of about $300 million.
The ASB Capital stock portfolios, worth $2 billion on Sept. 30, descended 19.5 percent in October, to $1.6 billion, for a loss of about $400 million.
But the impact was softened by gains in the bond portfolios, which rose from almost $2.8 billion to $2.9 billion, a gain of about $125 million or 4.5 percent.
The ASB Capital managers will tell you, quite frankly, that Oct. 19 and 20 were not a lot of fun. They also will tell you, as will most investment professionals, that the depth of the collapse and the swiftness with which it happened were unexpected.
Lois W. Burleigh, the director of equity investments, and Eugene W. Mulligan, the director of fixed-income investments, both spent those days trying to figure out the best strategies for coping with the decline.
The dilemma of moment, Burleigh recalled, was that stocks suddenly became very cheap and it was obvious that some unusual values were being created. But the question, she said, was: "Where was the bottom?"
In response, Burleigh bought some stocks where the values looked good and sold some stocks that were beginning to look expensive. In the process, she also repositioned some of her funds.
Burleigh came into Oct. 19 with about 12 percent of her funds in utilities, stocks that held up relatively well during the market slide. She reduced the investment to about 6 percent. At the same time, she raised her investments in the technology area.
The changes were part of her decision to shift from "defensive" stocks, such as tobacco and beverages, to "cyclical" stocks, such as railroads, forest products and technology.
Burleigh said she concluded that despite the downturn in the stock market, "the economy was not going to fall off a cliff." Even in a slow-growth economy, she thought cyclical stocks would do well. They also would benefit by a cheaper dollar, which lowers the price of U.S. goods overseas.
Mulligan also did some buying during the first two days of the collapse. He invested $137.5 million in seven-year Treasury notes in an effort to catch the rally in the bond market that he anticipated would follow the downturn in the stock market.
"The world had suddenly changed. And my expectations changed," Mulligan said. "I knew that whatever growth path the national economy was on was now going to be lower. We might even be looking at a recession."
As a result, he believed, the Federal Reserve would be put in a position where it would begin to ease credit and take the pressure off interest rates. Falling interest rates, in turn, would mean higher bond prices.
Almost immediately, he recalled, the collapse in the stock market sent many investors fleeing to safety in U.S. Treasury investments. That, too, spurred a wave of buying that sent bond prices higher, and Mulligan was able to catch a good part of the 10 percent upward move in bond prices.
Of course, not all investment management is conducted in the panic atmosphere of a market collapse. Usually, the action is just plain feverish.
More than anything, the management of a stock and bond portfolio resembles the fine-tuning of an orchestra. Especially in the bond area, a manager can spend much of his time trying to anticipate changes in interest rates.
One of the techniques for managing a bond portfolio, Collins said, is to lengthen or shorten the duration or maturity of the investments.
"If we think interest rates are going to go up, we sell long (dated) bonds and pull the maturity in. If we think rates are coming down, we do just the opposite," he said.
ASB Capital bond portfolios are actively managed and it is not unusual for the entire portfolio to be turned over within a three-month period, Collins said.
The choices faced by an equity manager are considerably wider and that tends to make the selection process more difficult.
The investment experience at ASB Capital offers a good example of the problem.
Going back a few years, ASB Capital was investing in growth companies with a large concentration in technology stocks. It worked well for a while but generally the approach lagged the performance of the Standard & Poor's 500, especially in 1985 when ASB Capital was up 16.8 percent while the S&P was up 31.7 percent.
When Burleigh took over the equity investments about 18 months ago, ASB Capital switched to a "relative value" approach to stock selection.
The theory is that an investor will get the best returns if she picks stocks that (1) offer good value relative to other stocks and (2) have strong or improving momentum. By the same reasoning, the investor should sell those stocks when they are no longer well-valued or their momentum deteriorates.
This strategy employs various yardsticks for defining relative value. One yardstick involves price-earnings ratios, another involves yields.
The first idea is to look for stocks whose current PE ratios, relative to the S&P 500, are in the bottom 30 percent of their historical range.
The second is to seek stocks whose yields, relative to the S&P 500, are in the upper 30 percent of their historical range.
If equity performance at ASB Capital has had its ups and downs over the years, the firm has fared somewhat better on the bond side. There, ASB Capital generally has run ahead of the Shearson Lehman Bond Index and has done better than most other bond managers.
The past few years, particularly, have produced good bond returns as interest rates tumbled and bond prices rose. For the three years of 1984, 1985 and 1986, ASB Capital was up 18.9 percent, while the Shearson Lehman index was up 17.3 percent.
The recent merger of American Security Bank into Maryland National Bank will add another $500 million to ASB Capital's assets. A small investment unit at Maryland National will become part of ASB Capital at the end of the year. ASB Capital has a growing amount of competition in the Washington area, although few manage as much money as ASB Capital or handle the broad range of accounts.
Robert E. Torray in Bethesda has about $1.4 billion under management. Bessemer Trust Co., which has a Washington office, manages $5 billion worldwide. And there are a growing number of individuals and firms in Washington that are opening small money management operations.
Collins looks forward to the day when all vestiges of the Glass-Steagall Act, which supposedly separates banks and brokerage firms, will be eliminated and banks will be allowed to own their own mutual funds.
"I think it is just a matter of time before either we'll have our own family of funds that people will market for us or we'll be able to market ourselves. I think that is clearly a coming phenomenon," Collins said.