Top-performing equity managers: Energy portfolios propel past small caps to dominate top 10

Energy strategies took four spots in the top 10 overall equity strategies in 2011, ending the dominance of small-cap strategies, which had been the leading strategy among the top 10 since the fourth quarter of 2010, according to Morningstar Inc.'s separate account/collective investment trust database.

For the five years ended Dec. 31, seven of the top 10 in Morningstar's U.S. equity separate account universe were energy strategies, said Diana Scott, a data analyst with Morningstar in Chicago.

“The presence of the equity energy class was pretty noticeable,” Ms. Scott said.

Energy strategy investments generally are master limited partnerships, which are not subject to income taxes, thus providing more cash flow and less restraint on growth, according to Ms. Scott. Those factors helped put energy strategies into the top 10.

MLPs “generally thrive in environments in which interest rates are stable or declining,” Ms. Scott said. “Federal interest rates were stable for 2011, so this may have provided a more conducive situation for them to post stronger returns.”

Equity strategies generally rebounded from a volatile third quarter. The median return for the fourth quarter was 12.16%, compared with -17% for the third quarter and -0.56% for the year.

The Russell 3000 index returned 12.12% for the quarter and just 1.03% for the year ended Dec. 31.

“Overall, 2011 was incredibly volatile,” Ms. Scott said. “It kind of led to a diverse representation from the first quarter to the fourth quarter in terms of which managers made the top 10 list.”

Despite the emergence of the energy strategies, the leader for the 12 months ended Dec. 31 was the special situation property real estate strategy of J.P. Morgan Asset Management Inc., with a gross return of 23.56%.

“They are a unique player. They haven't had any negative performance since the first quarter 2010,” Ms. Scott said. “Their approach is based on the belief that investment results can be achieved by focusing on value-added opportunities.”

The New York City-based firm's real estate portfolio has about 6% invested in an open-end J.P. Morgan liquidity mutual fund and 94% invested in special situation corporate bonds, Ms. Scott said.

J.P. Morgan spokeswoman Charlotte Powell said the portfolios managers declined to comment.

Invesco Ltd.'s master limited partnership came in at No. 2 with a 20.08% gross return for the year. The Atlanta-based firm's energy strategy focuses on companies that capitalize on natural gas growth and generally avoid stocks that are exposed to weaknesses in gas prices.

“What makes our product successful is a strong and deep team,” said Adam Karpf, portfolio manager of the MLP strategy. “We have a very structured and rigorous investment process, which is anchored by our comprehensive model.”

The portfolio has 15 to 25 stocks with an annual turnover rate of about 30% to 35%.

Mr. Karpf said some of the biggest drivers of the portfolio's performance over the past few years have been Enterprise Products Partners, Plains All-American Pipeline and MarkWest Energy Partners LP.

Mr. Karpf expects to see the energy strategy perform successfully throughout this year.

“Many of the trends last year will extend ... to both this quarter and into 2012,” Mr. Karpf said. “You see a very steep spread of returns in the industry. The guys at top continue to be guys announcing work growth projects and acceleration in growth, which provides visibility.”

In third place was the large-cap value strategy of Ardmore, Pa.-based Logan Capital Management Inc., with a gross return of 19.72%.

The strategy focuses on 12 large-cap stocks that were financially sound and had high-dividend yields, which proved to be beneficial in a down market, said Marvin Kline, managing director and value portfolio manager at Logan Capital. The portfolio had a turnover rate of about 30% to 40%.

“We hang our hat on the ability to perform well in down markets,” said Mr. Kline. “In a flashy up market, we won't hang on quite as much.”

Rounding out the top five for 2011 were the small-cap value strategy of 12th Street Asset Management LLC with a 19.64% gross return and Miller/Howard Investments Inc.'s distribution and merging utilities portfolio, which returned 19.62%.

12th Street's small-cap value portfolio was one of the only crossovers for the one- and five-year periods ended Dec. 31; it held the No. 1 spot on the five-year ranking with an annualized return of 28.29%, followed by its opportunity strategy with 23.01%. (All multiyear returns are compound annualized figures.)

“We are very consistent in our investment process,” said Michael O'Keefe, founding partner of Chicago-based 12th Street. “We're really dedicated to a concentrated portfolio and we're willing to hold cash when we're not finding bargains. I think it's also important we don't invest by committee.”

The small-cap value portfolio primarily has holdings in transportation, paper, pulp and retail. Some of the firm's most successful holdings over the past few years have been Buckeye Technologies Inc., Monro Muffler Brake Inc., and LKQ Corp. Mr. O'Keefe said turnover rate is about 40%.

Miller/Howard's utilities strategy has focused on infrastructure and foundational type investments since its inception more than 20 years ago. “Utilities have long been a great source of dividend growth,” said Bryan Spratt, portfolio manager at Miller/Howard, Woodstock, N.Y. “We've been focused on dividend equities strategies for 20 years.”

Some of the top-performing stocks for the strategy over the past several years have been El Paso Corp. and Southern Union Co.; the holdings in both have since both been sold by the firm.

Behind the two 12th Street strategies, other leaders for the five years ended Dec. 31, were: Invesco's MLP strategy, No. 3 with a gross return of 18.81%. Salient Partners LP's MLP energy strategy with 18.49%; and the TAAP precious metals strategy of AIS Capital Management LLC at 17.14%.

“Our belief is that growth in the global economy is in the developing world,” said John Hummel, chief investment officer at AIS Capital Management. “Therefore we want to be invested in things that the developing countries need, or things in the U.S. that might be selling into those markets.”

Mr. Hummel said the strategy is primarily invested in materials, energy, agriculture and tractor supply retailers. He did not cite a turnover rate but said that it is generally low over a long period of time.

For the five years ended Dec. 31, the median overall equity return was an annualized 1.29%; the Russell 3000 returned -0.01%.

Among collective trusts, real estate strategies comprised seven of the top 10 strategies for the year ended Dec. 31.

Prudential Retirement Real Estate Fund was first with a gross return of 13.93%, followed by the SSgA/Tuckerman Active REIT fund of SSgA Funds Management Inc. with 11.09%. In third was Adelante Capital Management LLC's total return real estate fund with 10.71%, while the Total Return REIT fund of Wilmington Trust Financial Fiduciary Service Co. came in fourth with 10.55%. Ranger Investment Management LP's Small-Cap Fund was fifth with 10.36%. The median one-year return for collective trusts was 0.42%.

For the five years ended Dec. 31, Speece Thorson Capital Group Inc.'s midcap value fund was first among collective trusts with an annualized return of 7.59%. In second was the small-cap opportunistic value fund of The Boston Co. with 7.39%, followed by Westwood Management Corp.'s smidcap blend fund with 7.28%. Rounding out the top five were Frontier Management LLC's small-cap value fund and Pyramis Global Advisors' small/midcap core fund, which returned 6.47% and 6.24%, respectively.

The five-year median return for collective trusts was 0.30%.