Smaller was better for the year ended Dec. 31 for equity managers in Morningstar Inc.'s separate account/collective investment trust database, and having investments in gold and technology didn't hurt, either.
At least five of the top 10 in Morningstar's equity universe were small-cap growth strategies, and two were small-cap value.
Small caps indeed were the big news for the year, particularly small-cap growth strategies, said Adam Baranowski, a data analyst with Morningstar in Chicago. The fourth quarter capped off a great year for the strategy, he said. The average small-cap growth portfolio in the Morningstar separate account universe returned 17.34% in the quarter vs. 12.43% for broad equity portfolios.
“Fourth-quarter returns in the small-cap market were exceptional,” he said. Microcap stocks in particular were strong. Mr. Baranowski said with microcaps, managers “try to invest before the growth prospects are built into the share price.”
For the year, the median overall equity strategy returned 19.59% while the Russell 3000 index returned 16.93%. The small-cap Russell 2000 index returned 26.85% for the year.
The leader for the year was New York-based Tocqueville Asset Management LP's Equity Gold strategy with a gross return of 57.17%. It was followed by the microcap strategy of Transamerica Investment Management LLC, Los Angeles, with a gross return of 55.43%, and the small-cap technology portfolio of Princeton Capital Management Inc., Princeton, N.J.
Princeton Capital's Young Enterprise Securities LLC had a gross return of 53.53% for the year ended Dec. 31. James Fitzpatrick, chairman of Princeton Capital, said the YES strategy is a non-registered combined fund representative of many separate accounts that focus on creative developments in the physical and life sciences. “Science is always the source of something new, bigger and better, and is always generating opportunities,” Mr. Fitzpatrick said.
One YES investment is AXT Inc., a Fremont, Calif., company that specializes in making semiconductors using gallium arsenide and other compound substrates. These types of semiconductors support circuitry that allows use of much less power and are in high demand by manufacturers of many hand-held devices such as cellular phones because of the lower power consumption.
The company, with facilities near Beijing, also has an interest in a Chinese company that produces gallium, Mr. Fitzpatrick said.
Mr. Fitzpatrick said AXT's stock was priced below $2 a share after the 2008 financial collapse, but now goes for about $11 a share.
Another YES investment is Universal Display Corp., a Ewing, N.J., creator of materials used in video displays of everything from smart phones to high-definition televisions.
Universal Display designs organic light emissive materials to create displays that are brighter than conventional LCDs and have other advantages. Mr. Fitzpatrick called this a “disruptive science,” which can shake up an industry and create a new set of opportunities for adaptive companies.
The YES portfolio began buying Universal Display stock almost 15 years ago at $4.75 a share. Currently, the stock trades upward of $37.
Mr. Fitzpatrick likes small-cap technology companies because “you can talk to the creative persons at young companies, face-to-face with the geniuses.”
“They tell us where tomorrow will be,” he said. “We find tomorrow by listening to those entities, small and large, who are shaping it.”