Small-cap strategies reclaimed the top spots in the overall equity rankings for the year ended Sept. 30, according to Morningstar Inc.'s separate account/ collective investment trust database.
“Small-cap players are definitely shining again,” said Andy Kwon, a data analyst for Chicago-based Morningstar. “I think part of that might be because people are becoming more confident. People were pessimistic, and now they see things are steadily growing and are willing to take a little more risk.”
Eight of the top 10 performing managers for the year ended Sept. 30 were using small-cap strategies, which haven't dominated the scene since the third quarter of 2011, according to Mr. Kwon. The other portfolios in the top 10 were mid- and large-cap strategies.
Equity strategies overall improved in the third quarter. The median return for all stock portfolios was 5.8% in the third quarter, compared with -4.39% in the second quarter. But the third quarter median slightly trailed the 6.23% return of the Russell 3000 for the period. For the 12 months ended Sept. 30, the median return for all stock portfolios was 28.3%, compared with 0.18% for the 12 months ended June 30. Meanwhile, the Russell 3000 for the year ended Sept. 30 was 30.2%.
Mr. Kwon also pointed out that every equity investment style exhibited positive median returns in the third quarter. “What it shows is that all the classes have been performing well, so it's safe to say things are improving,” Mr. Kwon said. “July was a rough month, but in August and September there was a turnaround. The last two months of the quarter is where these people were making money.”
The top performer for the year once again was Granahan Investment Management Inc.'s Small-Cap Focused Growth portfolio, with a gross return of 54.2% for the year ended Sept. 30, up 35 percentage points from the previous quarter's report.
“We are looking for what we consider "desert island' companies,” said Andrew Beja, managing director and portfolio manager for the Waltham, Mass.-based investment manager. “These are companies we would take on a stranded island; they have large opportunities for growth, very strong competitive positions and strong management cultures.”
Some of the companies in which the firm invests are SPS Commerce Inc., which provides next-generation electronic data interchange for large retailers, and Demandware Inc., which provides e-commerce software for online retailers.
The small-cap portfolio is just one of two crossovers from the June 30 reporting period, when large-cap strategies dominated the top 10. (The other crossover for the period was Kopp Investment Advisors LLC's small-cap growth portfolio, which was seventh in the rankings with a gross return of 48.22%.)