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Special report

Energy strategies on rise while small-cap growth wanes

Nancy Zevenbergen said the Z/Tech strategy looks for disruptive growth investments, such as Netflix and Tesla.

The top-performing domestic equity strategies for the year ended June 30 were all over the map.

No one strategy dominated the listing of the top 10 strategies in the separate account category, according to Morningstar Inc.'s separate account/ collective investment trust database.

Energy/master limited partnership strategies accounted for three of the top 10, making a comeback from last quarter when no MLP strategies placed in the top 10 for the 12-month period. Small-cap growth strategies, which dominated the returns for the year ended March 31 taking seven of the top 10 spots, accounted for only one of the best performers for the year ended June 30. Of the remainder, midcap strategies claimed three spots, small-cap took two and technology, one.

“The last few (quarters) have been pretty dominated by small- and microcap portfolios in particular,” said Adam Baranowski, Chicago-based database leader for separate accounts and hedge funds at Morningstar. However, the makeup of this quarter's list is a reflection of the strong performance of master limited partnerships, both for the quarter and over the past few years, said Mr. Baranowski. “MLPs have been consistent outperformers over the past five years,” he said.

Energy limited partnerships, a new category for the separate account database, had a median return of 33.7% for the year ended June 30 and an annualized 31.5% for the five years ended June 30, outpacing the median returns for the broad domestic equity categories during the same time periods, said Mr. Baranowski. (Previously, MLPs fell under Morningstar's equity energy category.)

The median return for all domestic equity separate account strategies was 25.59% for the year and 19.85% for five years, slightly higher than the Russell 3000 benchmark of 25.22% for one year and 19.33% for five years.

(All returns for periods of more than one year are compound annualized figures.)

"Weak' quarter for small caps

Small-cap strategies, which have dominated the past few quarters, had a “weak” quarter, said Mr. Baranowski. The median return of all small-cap strategies for the quarter ended June 30 was 2.17%, significantly lower than the 4.21% median return for all domestic equity strategies for the same period. Mr. Baranowski pointed out that small-cap growth was the “worst performing” Morningstar category for the quarter, returning a median 0.98%. Small-cap strategies accounted for three of the top 10 strategies in the one-year rankings this quarter. Midcap strategies also claimed three spots on the top-10 list. The median return for all midcap strategies was 3.85% for the quarter.

Despite the strategy shakeup, there were some consistencies in the one-year rankings since the first quarter. The Zevenbergen Z/Tech strategy, a growth strategy focused on technology and telecommunications, topped the list for the fourth consecutive quarter with a gross return for the year of 58.63%.

Nancy Zevenbergen, president and chief investment officer at Seattle-based Zevenbergen Capital Investments LLC, attributed the strategy's success to the team's role as an investor rather than a trader that invests based on price moves.

Ms. Zevenbergen said the team remains “passionate investors in disruptive growth set against market-timing investors of stock.”

Some of the holdings driving the strategy's performance for the quarter and for the year were Zillow Inc., Nextflix Inc., Vipshop Holdings Ltd. and Tesla Motors Inc., said Ms. Zevenbergen.

Mr. Baranowksi noted the strategy's one-year returns were primarily driven by a strong return of 34.34% for the quarter ended Sept. 30, 2013. Year-to-date, through June 30, the strategy has returned 9.35%, said Mr. Baranowski.

In second place was Chickasaw Capital Management LLC's MLP energy strategy with a gross return of 51.94% for the year. The strategy also topped the five-year list for the third consecutive quarter with an annualized gross return of 42.29%.

Matthew Mead, co-founder, principal and portfolio manager at Memphis-based Chickasaw said the firm's goal is to “build a portfolio with lower expected risk and a higher expected return than the average MLP,” in an e-mailed response to questions.

Two holdings that have contributed to the strategy's returns have been Enterprise Products Partners LP and Williams Companies Inc., wrote Mr. Mead.

“Both of these organizations have benefited from some of the primary themes in the MLP market, including growth from accretive acquisitions and organic growth projects,” wrote Mr. Mead. He noted the MLP market is “a primary beneficiary of the ongoing build-out of energy infrastructure needed to develop the U.S. energy shale base.”

Midcap blend

Following Chickasaw's strategy on the one-year list was Naylor & Co. Investments LLC's core composite strategy, a midcap blend strategy with a gross return of 48.07%. The strategy also placed third in the five-year ranking with an annualized 34.74%.

Chad Naylor, CEO and portfolio manager at the San Francisco-based firm, calls the strategy a “refined value investing strategy.” Mr. Naylor said he looks for companies that are “relatively inexpensive but have potential to grow fairly rapidly” and are attached to industries that are “serving fundamental consumer needs.”

Portfolio managers can rely on these industries, such as banking and travel, to come back if they are going through a cyclical downturn, said Mr. Naylor.

The portfolio's top performers for the five years through June have been Priceline Group Inc., BofI Holding Inc., Delta Airlines Inc., Avis Budget Group Inc., TripAdvisor Inc. LLC, Alaska Air Group Inc. and Acadia Healthcare Co. Inc.

Following Naylor & Co.'s strategy was Cushing MLP Asset Management's MLP institutional alpha strategy with a one-year gross return of 48.02%. In the five-year rankings, the strategy placed second with 36.62%. The strategy focuses on energy infrastructure investments, seeking long-term growth and assessing the quality of that growth.

Libby Toudouze, Dallas-based president of Cushing MLP Asset Management LP, said the portfolio's overall performance has been driven by crude oil and general partners.

She also identified natural gas transportation companies as a subsector with potential.

“The energy renaissance has truly been validated now,” said Ms. Toudouze, speaking generally about the energy industry in the U.S. “The amount of production every month, every quarter, continues to exceed estimates,” she said, adding the phenomenon could be contributing to the prevalence of high-performing energy related funds.

Rounding off the top-five performing separate accounts for the year ended June 30 was Husic Capital Management's concentrated midcap growth strategy with a gross return of 47.9%.

MLP dominance

In the five-year return rankings, energy/MLPs' dominance was clear, accounting for five of the top 10 strategies.

In fourth place, behind Naylor & Co.'s core composite strategy was Westwood Management Corp.'s MLP infrastructure renewal strategy with an annualized gross return of 31.66%, followed by Tortoise Capital Advisors LLC's midstream MLP separate accounts strategy, which returned an annualized 31.5%.

The Russell 3000 returned an annualized 19.33% over the five years ended June 30, while the five-year median return for overall domestic equity strategies was an annualized 19.85%.

In the collective investment trust universe, FMT/T. Rowe Price Health Sciences R1 claimed the top spot with a one-year net return of 39.96%. The FMT U.S. Growth Opportunities R1 strategy came in second, returning a net 36.8%. Also in the top-five were Wellington Management Co.'s Wellington CIF II Small Cap Opportunities strategy, with a net return of 34.1%; State Street Global Advisors' NASDAQ 100 index fund, 34.11%; and Columbia Trust Focused Large Cap Growth Fund, 33.76%.

The median return for collective investment trusts for the year ended June 30 was 24.5%.

All of the data for Pensions & Investments' quarterly “Top Performing Managers” report are provided from Morningstar's global separate account/collective investment trust database. For information on the database, please contact separate accounts@morningstar.com or call 312-384-4087.

This article originally appeared in the August 18, 2014 print issue as, "Energy strategies on rise while small-cap growth wanes".