Large-cap value managers made up the majority of the top 10 overall domestic equity strategies for the year ended March 31, according to Morningstar Inc.’s separate account/collective investment trust database.
Six of the top 10 managers were domestic large-cap value equity managers, although only one of the top three was a value manager.
The latest rankings contained considerable turnover from the previous quarter, one that was dominated by large-cap growth equity strategies, which made up nine of the top 10 overall spots.
For the quarter ended March 31, the median return for domestic value equity strategies was 2.13% in the Morningstar universe, compared with -1.66% for domestic growth equity strategies. The Russell 3000 Growth index increased 0.34% during the same period, while the Russell 3000 Value index returned 1.64%.
For the year ended March 31, the overall domestic equity universe returned a median -3.23%, while growth returned -4.11% and value returned -2.38%.
“I think concerns about China, concerns about volatility have led investors to flee to higher-yielding stocks,” said Alec Lucas, analyst of manager research at Morningstar in Chicago.
Over the past three to six months and year, telecom and utilities were the top sectors, he said.
Among all domestic equity strategies, the top spot went to a strategy in the Morningstar utilities category: Levin Capital Strategies LP and its utilities yield strategy, which returned a gross 13.05% in the year ended March 31.
Neil Stein, New York-based portfolio manager for Levin Capital, said in a telephone interview that the strategy, which was launched in March 2010, has between 10 and 15 utility company holdings, half of which are the highest-yielding stocks in the sector, and half of which they label as total return, which combines high-yielding stocks as well as earnings growth.
“These companies are actually fairly bond-like relative to other equity sectors,” Mr. Stein said. “It’s a unique sector of the equity market. If you look at what bond investments get, it’s basically a contractually obligated rate of return.”
Utility company rates of return, meanwhile, are determined by state utility regulators. Mr. Stein said how managers determine which kinds of holdings the strategy should have is by asking, “What’s the rate of return that the state regulators assign to them and how do they manage their business to achieve that return?”
Among the stocks that have performed particularly well, Mr. Stein named American Electric Power, whose excellent returns he attributed to the utility selling off non-regulated parts of its business and thus becoming a safer company, and Great Plains Energy of Missouri, which has pending legislation that is reforming the regulatory environment to be friendlier to the company.
Ranked second overall was the highest-ranked value strategy, belonging to Federated Investors Inc., Pittsburgh, whose strategic value dividend strategy had a gross return of 12.69% in the year ended March 31.
Daniel Peris, senior vice president and senior portfolio manager and head of the strategic value dividend team, said in a telephone interview that he views his team as business owners.
“This is a stock market-as-business investment platform,” Mr. Peris said, “so we are focused on cash flows that are actually distributable to company owners. We are looking for high-yield dividend growth.
“We view ourselves as business owners and are tapping into cash streams that just happen to be publicly traded,” he added. The strategy consists of “around 35 of said distributable cash streams.”
Polen Capital Management LLC, Boca Raton, Fla., which ranked third with its focus growth strategy, was the sole large-cap growth manager that remained in the top 10 from the previous quarter. The strategy returned a gross 11.78% in the year ended March 31. It ranked second last quarter.
“It’s a 27-plus year-old strategy,” said Dan Davidowitz, portfolio manager and chief investment officer, in a telephone interview. “It’s been run very consistently over that whole time. It’s a high-quality, concentrated large-cap growth portfolio. We invest in companies that have pristine balance sheets.”
Mr. Davidowitz said the earnings growth from the concentrated portfolio of companies — the strategy has had a total of only 106 holdings in its entire history — was “very broad-based,” and among the reasons the strategy stayed ahead of other large-cap growth strategies was the fact that most of the strategy’s holdings are global, avoiding currency headwinds.
In 2015, “we had seven companies that had 25% or higher returns, so that’s a lot when you only have 20 holdings.” While the first quarter of 2016 was basically flat, Mr. Davidowitz said in 2015 the strategy had built up a huge lead that contributed to its remaining in the top 10.
Crest Investment Partners LLC’s dividend equity strategy, a domestic large-cap value equity strategy, ranked fourth with a gross return of 11.01% in the year ended March 31.
The Palm Beach, Fla.-based firm’s strategy focuses on large-cap companies that have consistently provided dividends and growth in those dividends over the long term, beyond 10 years, said Massimo Santicchia, co-founder and chief investment officer, in a telephone interview.
“We don’t focus necessarily on the dividend yield itself, which I think is myopic and dangerous (with) value) companies that have a very high dividend yield, it may mean that investors believe the dividend is not sustainable, so eventually the companies cap the dividends,” Mr. Santicchia said.
The strategy does not focus on specific sectors, but rather has a diversified selection of companies concentrated on very strong balance sheets, high-credit worthiness and high liquidity, Mr. Santicchia said.
While the strategy concentrates on long-term performance, Mr. Santicchia said some holdings that performed particularly well over the past year were International Flavors and Fragrances, Johnson & Johnson and Sysco Corp.
For the five years ended March 31, the leading strategy was Naylor & Co. Investments LLC’s core composite strategy, a domestic midcap growth equity strategy, with a gross annualized return of 22.12%. The median annualized gross return for the universe for the five years ended March 31 was 9.99%.
The rest of the top five included: Pacific Investment Management Co. LLC’s stocks plus long-duration strategy, with an annualized gross return of 20.23%; BNY Mellon Investment Management’s dynamic U.S. equity strategy, at 16.28%; MPI Investment Management Inc.’s dividend equity strategy, at 16.15%; and Martingale Asset Management LP’s low volatility large-cap strategy, at 15.86%.
For collective investment trusts, the top-ranked strategy for the year ended March 31 was J.P. Morgan Asset Management’s JPMCB commercial property CIT, with a net return of 10.37%.
The rest of the top five CIT strategies were: American Century Investments’ U.S. value yield equity CIT, Trust-2 and Trust-1, which returned a net 7.96% and 7.69%, respectively; AEW Capital Management LP’s real estate securities CIT, 5.85%; and Security Capital Research & Management Inc.’s preferred growth CIT, 5.6%.
