Large cap equities take 6 of top 10 spots

Five different investment styles made up the top 10 overall equity rankings for the year ended June 30, according to Morningstar Inc.'s separate account/collective investment trust database.

Six of the top 10 overall strategies were large cap, with two blend, two growth and two value strategies. Small-cap growth and real estate each had two managers in the overall top 10.

The median return for all separately managed stock portfolios in the Morningstar database was 0.18% for the 12 months ended June 30, while the Russell 3000 index returned 3.84%.

The heterogeneous makeup of this quarter's top 10 is in stark contrast to the previous quarter, when eight of the top 10 were large-cap growth managers, according to Diana Scott, product development manager for separate accounts with Morningstar in Chicago.

Because of the wide variety of investment styles represented in the top 10, the primary reason these strategies made the top of the list is simply that “they produced marginally better returns than others,” said Ms. Scott.

“To make a long story short, "What's going on?' is the question that everyone wants the answer to. There is no clear cut answer,” she said.

The top performer for the year was Granahan Investment Management Inc.'s Small-Cap Focused Growth portfolio, with a gross return of 19.57% in the year ended June 30.

The strategy is one of four for the boutique small-cap growth firm.

“We've got nine people doing nothing but small-cap growth research,” said Andrew Beja, managing director and portfolio manager for the Waltham, Mass.-based investment manager.

“We think it's a very attractive asset class,” Mr. Beja said. The focused growth product, which just hit its five-year mark in July, consists of what Mr. Beja said are “companies we'd take to a desert island for five to seven years.”

The firm selects stocks best able to sustain earnings growth of at least 15% over that time period, stocks that have both “attractive risk/reward and ... very good expected returns and we're very disciplined about both,” according to Mr. Beja.

“We look at companies that can grow year in, year out at that 15%. If the Russell 2000 broad group of companies (is) not growing at that 15% and ours do, we're starting off in a pretty good spot,” he said. “We're very disciplined on the risk/reward, particularly on the downside of that equation and it can work particularly well when people are chasing a sector or factor that's not part of our discipline.”

“Small-cap growth is ripe with very attractive growth companies, but if you're not careful with risk/reward it can very treacherous and we pay attention to that.”

The second-best performing manager in the overall separate account equity universe for the year was Groesbeck Investment Management Corp., with its growth strategy returning a gross 19.14% in the year ended June 30.

The large-cap growth strategy's focus is companies whose annual estimated earnings growth is at least 10%, according to the strategy's Morningstar profile.

It features a quantitative analysis based on market cap and financial parameters, and a “bottom-up fundamental analysis of top-ranked companies,” according to the Morningstar profile.

Logan Capital Management Inc.'s Concentrated Value strategy came in third, with a one-year gross return of 18.84% as of June 30.

The strategy concentrates on 10 to 12 large-cap stocks, according to Marvin Kline, managing director and co-portfolio manager for the strategy at the Ardmore, Pa.-based firm.

“We have been managing this portfolio since 1996 ... we're in the 17th year and during that period we've outperformed the Russell 1000 for the majority of those years, so this isn't a fluke,” said Mr. Kline.

The strategy uses what Mr. Kline calls a “quantamental” process — quantitative and fundamental — looking for “very strong companies with very strong cash flow.”

Mr. Kline said all of the portfolio's stocks had a positive return for the 12-month period. Among the strongest-performing stocks in the portfolio were Philip Morris USA Inc., Kimberly-Clark Corp. and Intel Corp., all with one-year returns of more than 20%. The worst-performing stock was Royal Dutch Shell PLC at 2%.

“We ignore the news and I think one of the good things about being at Logan is that they don't question our strategy,” said Mr. Kline. “We deviate from the market at times quite a bit.

“We can ignore the short-term swings.”

Kopp Investment Advisors LLC's AccruHealth strategy came in fourth, with a one-year gross return of 18.26% as of June 30.

The small-cap growth strategy, begun in the third quarter of 2008, looks to exploit opportunities in health care, according to Matt Arens, president and senior portfolio manager of the Bloomington, Minn.-based firm.

“(This) is a tremendous opportunity that has been created by the dynamics that have been lined up within the health-care space,” said Mr. Arens.

Stock selection is based partially on “identifying key themes within health care, and one of those is reducing costs in the overall process.”

“We don't just ask the question "Is this better medicine?' we ask the question "Is this better medicine at a better cost?' ” he said.

Among the successful stocks for the strategy has been Akorn Inc.

“They're involved in the generic drug space but importantly they're involved in more niche opportunities like injectable drugs,” said Mr. Arens.

Rounding out the top five performers for the year was Analytic Investors LLC's U.S. low volatility strategy, with a one-year gross return of 16.39% as of June 30.

The strategy targets what Analytic calls low-volatility stocks in the S&P 500 and Russell 1000, according to Harindra de Silva, president and portfolio manager at the Los Angeles-based firm.

The strategy targets a low-standard deviation at the portfolio level with no large individual positions and 2.5% weight for lowest volatility stock and a 0.75% weight for the highest volatility stock. Out of the 100 holdings in the strategy, Analytic avoids large holdings and makes sure there is less than a 15% weighting to any one industry.

Mr. De Silva attributes the strategy's success during the highly volatile year to not having to make up as much ground during down times.

“The market's down 50, we're down 20 (and) we don't have as much to make up,” he said.

For the fifth straight quarter, 12th Street Asset Management Co. LLC's small-cap value strategy was the top-performing manager for the five-year period with gross annualized returns of 22.7%, followed by the manager's Asset Opportunity portfolio at 17.75%.

The rest of the top five managers for the five-year period were: AIS Capital Management LLC's TAAP precious metals strategy at No. 3 with a gross return of 15.82%; Invesco Ltd.'s MLP strategy, 12.85%; and Beaumont Financial Partners LLC's BCM Diversified Equity Premium and Sector Premium IDX, tied at 12.01%. All figures are annualized.

The annualized median return for all separate account strategies in the Morningstar universe was 1.19% for the five years ended June 30, while the Russell 3000 index returned 0.39%.

Among collective trusts, real estate strategies grabbed the top six spots for the year ended June 30; in the top 10 there were also three large-cap strategies and one small-cap strategy.

Adelante Capital Management LLC's Total Return real estate fund was first with a gross return of 15.54%, followed by Wilmington Trust Fiduciary Service Co.'s Total Return REIT portfolio at 13.99%. The rest of the top five was BlackRock Inc.'s U.S. Real Estate Securities Index fund, at 12.74%; the Prudential Retirement Real Estate Fund, at 12.23%; and Washington Capital Management Inc.'s Real Estate Equity, at 12.13%. The median one-year return for collective trusts was 1.54%.

For the five years ended June 30, Real Estate Management Services Group LLC's Real Estate Value Opportunity fund was first among collective trusts with an annualized gross return of 7.04%. In second was The Boston Co.'s small-cap opportunistic value fund at 6.48%, followed by Pyramis Global Advisors' small/midcap core pool, at 5.91%; Speece Thorson Capital Group Inc.'s value fund, at 5.58%; and Wilmington Trust Fiduciary Service Co.'s small company growth, at 5.16%. The five-year annualized median return for collective trusts was 0.59%.