The places to be for international investors in 2006 were emerging markets and real estate.
The median emerging markets separate account return for the 12 months ended Dec. 31 topped those of global and international separate accounts and international equity commingled funds, according to the Morningstar Separate Account/Commingled Fund Database.
For the year, emerging markets separate accounts returned a median 33.3%, compared with 26.6% and 22.3%, respectively, for international and global separate accounts, and 26.7% for commingled international funds. The Morgan Stanley Capital International Emerging Markets Free index returned 25.6% for the year.
Nordea Investment Management's Eastern Europe equity strategy led the performers for emerging markets separate accounts in 2006 with 50.8%. Rounding out the top five were American Century Investments' emerging markets strategy, which returned 45.1%; Baillie Gifford Overseas emerging markets strategy, 41.6%; GE Asset Management, 40.3%; and Nicholas-Applegate's Capital Management's emerging markets opportunities approach, 40.1%.
Michael Donnelly, vice president for emerging markets at American Century, Kansas City, Mo., and senior portfolio manager of the firm's $690 million emerging markets strategy, attributed the account's performance to "good stock selection, what we said we'd try to be good at."
Investments in Russian food retailers helped boost performance Mr. Donnelly said. Also helping returns were investments in Chilean retailers such as Empresas La Polar SA, as that country's economy strengthened.
"We're overweight in areas where economic growth is quite strong" including Brazil and China, and in regions where authorities are giving the public purchasing power by increasing wages, Mr. Donnelly said. He is "cautiously optimistic" for 2007, believing growth in those countries will slow somewhat.
Vincent Willyard, managing director and portfolio manager for the international all-cap growth and international small-cap growth strategies for Nicholas-Applegate Capital Management LLC, San Diego, said the approach performed well in 2006 by overweighting investments in regions where fund managers saw "strong, sustainable growth." Top performers included Chinese consumer names such as athletic shoe company China Hongxing Sports Ltd. and energy infrastructure investments.
Brazil's ALL America Latina Logistica SA, which owns the country's rail system, also helped returns.
For the most part, the fund's philosophy is to invest in "smaller or midcap niches," Mr. Willyard said.
While emerging markets strategies had the best median return, international separate accounts claimed the top in terms of the highest returns for the year. Oberweis Asset Management's China Opportunities composite, investing in Pacific/Asia ex-Japan stocks, returned 83.1%.
Other top performers in the international category included ABN AMRO Property Securities Europe, which returned 70.9%; F&C European Real Estate, with 70.2%; ABN AMRO Global High Income Property, 49%; and Lazard Asset Management Emerging World, an international large-cap growth fund, with 45.4%. The Morgan Stanley Capital International Europe, Australasia and Far East index returned 13.8% for 2006.
James W. Oberweis, president of Lisle, Ill.-based Oberweis Asset Management Inc., said the portfolio benefited from a "concentrated strategy," with a "strong focus on companies that are identifying ways "to tap into the Chinese consumer market and the emerging middle class in China."
The top five global separate accounts were: ABN AMRO Global Property Securities, with 52.9%; F&C Asset Management's World Real Estate ex-Asia and Africa, with 47.1% and its F&C World Real Estate composite with 44%; Validea Dividend Value, with 38%; and Nuveen Investments' Tradewinds Global All Cap, with 34%. The Morgan Stanley Capital International World index returned 13.5% for 2006.
Within global and international separate accounts, real estate portfolios occupied six of the top 20 spots, according to Morningstar's data. Dirk Molenaar, senior portfolio manager, global real estate securities, for F&C Asset Management PLC, London, said his strategies succeeded by overweighting investments in strong markets such as France and underweighting in countries such as Austria and Canada. Good stock selection — including in the U.S., Australia and the U.K. — also helped the F&C portfolios.
John Reese, chief executive officer of Validea Capital Management, West Hartford, Conn., said the portfolio's strong performance was due to "removing emotion" from the quantitative strategy, and ignoring what the rest of the market was doing. Investments in oil company Chevron Corp., and Bank of Ireland helped drive the year's robust performance.
David Iben, chief investment officer of Los Angeles-based Tradewinds Global Investors and portfolio manager of the global all-cap strategy, said in an e-mail: "We have continued to find value pricing for some of the best positioned companies," including "oligopolistic companies involved in the production and distribution of food, energy and electricity."
Hydroelectric utilities and precious metals were also strong market performers last year, he added.
The top five commingled international funds were: Barclays Global Europe ex-U.K. Alpha Tilt, with 39%; Janus Capital Management Institutional Equity, a large-cap growth fund, 36.4%; Pictet Asset Management International Equity, a large-cap blend fund, 35.9%; Freedom Capital Management Freedom International, also a large-cap blend, 34.6%; and Barclays Global EAFE Ex-Japan index fund, another large-cap blend, 34%.