Small-cap strategies took five of the top 10 spots in Morningstar Inc.'s domestic equity separate account/collective investment trust database for the year ended Sept. 30.
The previous quarter, real estate security portfolios held nine of the top 10 spots for the year ended June 30. Not one of those strategies appears in the top 10 this quarter.
For the three and 12 months ended Sept. 30, the overall domestic equity universe returned a median 5% and 12.96%, respectively, while the Russell 3000 index returned 4.4% and 14.96%, respectively, during those same time periods.
In the Morningstar universe, the median return for domestic value equities was 14.88% for the year ended Sept. 30, compared to 11% for domestic growth strategies. During that same time period, the Russell 3000 Value index returned 16.38%, while the Russell 3000 Growth index returned 13.64%.
While small cap represents the most of any style of domestic equity strategy in the top 10 this quarter, precious metals equities took the top two spots.
“We invest on a global basis,” said Caesar M.P. Bryan, portfolio manager, in a telephone interview, “and we try to give our clients the best exposure we can to move with the performance of gold equities and of course, the prime driver of that is movement in the gold price.”
Mr. Bryan said the recovery of gold prices in 2016 was the primary driver in the success of his strategy. The price of gold had dropped about 40% between January 2012 and January 2016, due to what Mr. Bryan said was the expectation that central banks had finished taking extraordinary measures with monetary policy. When the Bank of Japan moved in January 2016 to introduce quantitative easing with a negative interest rate, gold prices started climbing again.
As a result, “the sector doubled,” Mr. Bryan said. Among the holdings that he said did “spectacularly well” were Barrick Gold Corp., Fresnillo PLC and Asanko Gold Inc.
Wells Capital Management, San Francisco, took the second spot with its precious metals strategy, returning a gross 86.15% in the year ended Sept. 30. Officials at the firm could not be reached for comment.
According to its Morningstar profile, the strategy “creates a portfolio that is non-diversified and that will normally invest at least 80% of its assets in investments related to precious metals, including securities of precious metals companies, debt securities linked to previous metals and common or preferred stocks of wholly owned subsidiaries of the fund that invest in precious metals and minerals.”
As of June 30, the five largest holdings in the strategy were Randgold
Resources Ltd., Agnico Eagle Mines Ltd., Newmont Mining Corp., Fresnillo and Kinross Gold Corp.
Schneider Capital Management Corp.'s small-cap value strategy ranked third with a gross return of 35.06% in the year ended Sept. 30.
The Wayne, Pa.-based firm is a deep value manager, said Arnold C. Schneider III, president, chief investment officer, principal and portfolio manager, in a telephone interview.
“We're trying to buy stocks that are really cheap relative to the market where we see some chance for improvement in their fundamentals,” Mr. Schneider said.
In the past year, Mr. Schneider said half of the strategy's outperformance has come from two stocks from the energy sector, in which the strategy is overweight. Still, he cited stock selection as more the reason for outperformance than being overweight in the sector, primarily because of holdings in SM Energy Co. and WPX Energy Inc..
Mr. Schneider said the success of the strategy came from stock selection during a five-year period in which “deep value has been dramatically out of favor even within value” and “has been a very, very tough place to operate.”
However, deep value characteristics started to come back into favor in September, he said. “I think we're in the first inning of a DV (deep value) cycle that's emerging,” said Mr. Schneider.
BP Capital Fund Advisors, Dallas, took fourth place with its TwinLine energy strategy, which returned a gross 34.35% for the year ended Sept. 30. The firm was founded in 2013 to offer to the public the TwinLine funds, an extension of longtime energy investor T. Boone Pickens' BP Capital, a hedge fund he founded in 1997.
Mark Laskin, chief investment officer and portfolio manager at BP Capital Fund Advisors, said in a telephone interview that the growth of the energy industry in shale “has meant there are different industries that have been beneficiaries,” beyond just oil and gas companies. “When we think about the energy industry, we focus from the suppliers of energy all the way to the users of energy,” Mr. Laskin said.
Thinking broadly in terms of energy enables the portfolio managers to shift positions in companies that benefit from rising commodity prices as prices rise, and companies that benefit when prices are falling, he said.
“Oil prices troughing in the mid-20s (per barrel) gave us reason” in 2015 to take positions in companies that benefit from rising commodity prices, “meaning the producers of oil and gas,” Mr. Laskin said.
“We moved over 40% of the portfolio into those types of companies,” he added.
The largest holding in the portfolio in the past couple of quarters has been WPX Energy. In 2015, WPX “bought a company, RKI, which has drilling interests in West Texas in the Permian Basin. They announced that just before oil prices just started really, really falling. By making that acquisition ... they levered their company from a debt perspective at the same time there were questions about the price they paid. They had a lot of natural gas drilling operations and not a lot of oil-drilling operations,” Mr. Laskin said.
“The stock fell in the beginning of the year, we owned it and bought more at that low level and now that stock has a strong performance for us through the end of the third quarter.”
“I think when it comes to thinking about an energy strategy, the fact that we have decades of knowledge of not just geology but operating drilling operations across the country is something that's really unique in this kind of strategy,” he added.
Ranked fifth was Kayne Anderson Rudnick Investment Management LLC, Los Angeles, with its small-cap sustainable growth strategy returning a gross 33.89% in the year ended Sept. 30.
“Our strategy is to find businesses that we think can generate enduring growth via a very effective competitive barrier,” said Todd Beiley, portfolio manager and senior research analyst, in a telephone interview. “So we're not after the highest absolute growth rates in the near term and we're not looking to buy purely cheap securities; we're looking to find businesses we think have the most persistent, longest-lasting growth by virtue of their competitive protections.”
One holding that has performed particularly well for the strategy, Mr. Beiley said, is Shutterstock Inc., the stock photography, footage and music company.
“Our thesis — and the reason we own the business — (is) we think they've got a pretty powerful position as the deepest network connecting both sides of photographers — contributors as well as buyers — and so we think that's a pretty powerful competitive position to be in,” Mr. Beiley said. When Adobe Systems Inc. bought competitor Fotofilia, there was some fear Shutterstock would falter, but Mr. Beiley said in the past year the stock has performed strongly.
“Our work said that Shutterstock's competitive position would remain strong, so we added to our holdings when the stock was weak,” Mr. Beiley said. “Financials continue to be healthy. Adobe is not materially having an impact on their position.”
For the five years ended Sept. 30, the top-performing strategy was Naylor & Co. Investments LLC's Core Composite strategy with an annualized gross return of 27.61%.
The rest of the top five strategies in the five-year period were: Donald Smith & Co.'s microcap value equity strategy, with a gross return of 25.6%; BMO Asset Management Corp.'s microcap equity strategy, 24.64%; NorthPointe Capital LLC's microcap value strategy, 24.44%; and Financial Trust Asset Management's health value strategy, 24.16%. All five-year returns are compound-annualized.
In the domestic collective investment trust universe, Edge Asset Management's smidcap value equity fund had the best performance, returning a net 25.07% in the year ended Sept. 30.
The rest of the top five strategies in the CIT universe in the year ended Sept. 30 were: Artisan Partners (APAM)' equity trust fund, which returned a net 24.67%; DePrince, Race & Zollo Inc.'s large-cap value CIT, 23.48%; American Century Investment Services Inc.'s U.S. midcap value equity fund, 20.49%; and Champlain Investment Partners LLC's midcap collective fund, 20.37%. ?
All data for Pensions & Investments top-performing managers report are provided from Morningstar's global separate account/ collective investment trust database. The data for the rankings on which this story is based were pulled Oct. 25. For information on the database, please contact separate email@example.com or call 312-384-4087. ??