Despite the strong small-cap performance, the leader for the 12 months ended June 30 was the Energy Opportunities portfolio of Orleans Capital Management Corp., with a gross return of 66.6%.
“My outlook remains strong,” said L. Farrell Crane, Austin, Texas-based managing director of the strategy. “I don't think you will see a crazy drop in demand globally (for energy fundamentals) ... The demand in emerging nations (results) in increased levels of capital spending, which becomes revenue for oil businesses.”
The portfolio covers the entire energy sector with 35 to 40 stocks, predominantly weighted toward the general oil service sector which provides equipment and services associated with the exploration and production of oil and natural gas. Mr. Crane said the firm looks for niche companies specializing in goods and services used in producing oil from horizontal wells drilled in shale rock.
Orleans Energy Opportunities was followed by the small-cap value strategy of Memphis, Tenn.-based SouthernSun Asset Management LLC with a gross return of 65.98%. SouthernSun's smidcap composite also ranked in the top 10, coming in at eighth with a 61.22% gross return.
“We have been doing the same thing for 22 years,” said Michael Cross, managing director and research analyst at SouthernSun. “We look for companies that are dominant in the market niches in which they participate, with a history of generating cash, and with strong balance sheets. We also look for management teams that have a track record of effective leadership in a variety of market conditions.”
Mr. Cross pinpointed two companies in the small cap portfolio of 20 to 30 stocks that were strong contributors to the 12-month returns, Darling International Inc. and Chicago Bridge & Iron Co.
In 2010, Darling, which has two segments — rendering and restaurant services — acquired Griffin Industries LLC, a privately held company in the same line of business. “The acquisition of Griffin more than doubled the EBIDTA of Darling's business, in my view,” Mr. Cross said. “Our exposure to energy and energy infrastructure through companies like Chicago Bridge & Iron also helped performance.”
Bennett Lawrence Management LLC's midcap growth strategy came in at No. 3 with a 63.36% gross return for the year. The strategy focused on finding high-name consumer brands that did not have debt problems, such as Tempur-Pedic International Inc., Lululemon Athletica Inc. and Chipotle Mexican Grill Inc., said Alex Ely, co-portfolio manager on the strategy and chief portfolio strategist for the New York-based firm.
“What worked well is concentrating on companies that deliver secular growth and are not reliant on the economic cycle to grow, and finding companies whose business didn't involve debt,” Mr. Ely said.
Rounding out the top five for the one-year period were the opportunity strategy of 12th Street Asset Management LLC with a 63.03% gross return and Princeton Capital Management Inc.'s Young Enterprise Shares LLC with a 62.25% gross return.
For the five-year period ended June 30, 12th Street's opportunity strategy was the only carry-over from the one-year top performers, ranking first with a compound annualized 28.17%, greatly outdistancing second place Insight Capital Research and Management Inc.'s concentrated growth midcap strategy, which returned 19.58%.
Energy and precious metals strategies made up five of the top 10 in the five-year compound annualized returns. Mr. Baranowski said the energy subset in the overall Morningstar universe had the highest median return at 15.14% in the five-year period, compared with 4.55% for overall domestic equity strategies.
Buckeye Technologies Inc. was the big winner for 12th Street's portfolio, increasing its share value from the low single-digits to $25 in the more than three years the firm has had holdings, said Michael O'Keefe, founding partner of the Chicago-based firm. Buckeye had a 17% price increase this January in the cellulose business, the first time in the industry's history, and another price increase could be on the way in January 2012, Mr. O'Keefe said. The company was able to remain profitable and pay down debt, even during 2008 and 2009, he added.
Insight's concentrated growth strategy emphasizes a high turnover rate with quality stock selection opposed to long-term holdings, said Mike Ashton, co-portfolio manager with Randall Yurchak. The portfolio consists of about 12 to 15 stocks with a turnover rate of 700% to 800%.
“With stock selection, the No. 1 thing we look at is what is working most recently in outperforming the market for two quarters,” Mr. Ashton said. “What's helped us is we don't have bias with a sector, but follow what the market is saying is working.”
Mr. Ashton said the strategy is an all-cap product, but is biased toward small caps that can produce the biggest output. Some of the strong contributors that were in the portfolio the longest, two quarters or more, were SXC Health Solutions Corp. and IPG Photonics Corp. Mr. Ashton said other strong holdings during the past five years were DryShips Inc., STEC Inc., Crocs Inc. and Force Protection Inc. as well as Green Mountain Coffee Roasters Inc., which currently accounts for 15% of the portfolio.
Third place in the five years ended June 30 was Tocqueville Asset Management's gold equity strategy with 18.79%. Tocqueville has been a mainstay near the top of five-year returns for several quarters. AIS Capital Management LLC's TAAP precious metals strategy was fourth with returns of 17.43%, while the MLP composite portfolio of Eagle Global Advisors LLC rounded out the top five with 17.27%. For the five years, the median return was 4.55%, and the Russell 3000 returned 3.35%.
Among collective trusts, Ranger Investment Management LP's Small Cap Fund was first for the one-year ended June 30 with a gross return of 58.26%, while the small company growth portfolio of Wilmington Trust Fiduciary Services Co. was second with 57.59%. The Hand Benefits & Trust Co.'s growth fund was third with 53%, while Pyramis Global Advisors' small/midcap growth and small/midcap core portfolios rounded out the top five with 50.79% and 50.62%, respectively. The median one-year return for collective trusts is 32.76%.
For the five years ended June 30, The Boston Co.'s small-cap opportunity value equity fund was first with a gross return of 13.88%. In second was the smidcap fund of Westwood Management Corp. with 12.03%, followed by Pyramis' small/midcap core pooled fund with a return of 11.58%. Fourth place belonged to Speece Thorson Capital Group, Inc.'s midcap value fund, returning 10.39%, while Champlain Investment Partners LLC's small company fund rounds out the top five with returns of 10.28%. The median fund returned 3.52%.