Small-cap growth strategies dominated for the year ended June 30, making up eight of the top 10 domestic equity strategies, according to Morningstar Inc.'s separate account/collective investment trust database.
It was the second straight quarter of small-cap growth strategies leading the way in the top 10. For the year ended March 31, five of the top 10 strategies were small-cap growth.
Of the previous top 10, six strategies are making repeat appearances for the year ended June 30.
Tony Thomas, manager research analyst at Morningstar, Chicago, said in a telephone interview that while they performed exceptionally well in the year ended March 31, the recent attention to rising tariffs has helped contribute additional outperformance for small-cap strategies in the second quarter as well.
"They tend to be domestically focused," Mr. Thomas said, "and tend to be benefiting from what is a very strong domestic category. I think in 2017, small-cap growth did OK but it was certainly a large-cap growth market in 2016-17. Now you're seeing the small-cap growth folks join the party."
Mr. Thomas said technology and health-care stocks within that universe have continued to provide significant outperformance in 2018, while others that have lagged in recent years have picked up steam.
"Energy is going a lot better, consumer staples are doing a lot better," said Mr. Thomas. "Those don't look great, say, on year-to-date numbers, but in the second quarter energy looked a lot better. Now they're starting to see some earnings momentum and some stock price momentum come out of that."
While small-cap growth strategies dominated significantly for the year ended June 30 and no value strategies appeared, Mr. Thomas noted solely for the second quarter of 2018, the Russell 2000 Value index performed better than the Russell 2000 Growth index, returning 8.3% vs. 7.23%. For the year ended June 30, the Russell 2000 Growth index returned 21.86% and the Value index returned 13.1%.
Overall in Morningstar's universe, domestic equity strategies returned a median 13.72% for the year ended June 30. The Russell 3000 returned 14.78%.
Morningstar's median return for domestic equity growth strategies for the year ended June 30 was 19.89%, while the median return for domestic equity value strategies was 10.62%.
For the fourth straight quarter, Kayne Anderson Rudnick Investment Management LLC's Small-Cap Quality Select strategy occupied the No. 1 spot — and again by a wide margin — returning a gross 80.36% for the year ended June 30. The manager also took the ninth overall spot with its Small Cap Sustainable Growth strategy returning a gross 44.83% for the year.
The former strategy is a non-tactical strategy that seeks "to invest in businesses with long-lasting competitive barriers," said Todd Beiley, portfolio manager and senior research analyst at Kayne Anderson Rudnick, in an email.
The key, he said, is not to overdiversify. The Quality Select strategy has less than 10 holdings, meaning "the market value of our portfolio can be erratic in (the) short term but ... (we believe it is a) prudent way to invest for long term," Mr. Beiley said.
As of June 30, according to Morningstar's profile of the strategy, Quality Select held six stocks. One standout, particularly in the second quarter, Mr. Beiley said, was The Chefs' Warehouse Inc., a food distributor to higher-end restaurants.
Its competitive advantage is "that large volume distributors have difficulty providing small order quantity delivery and inventory diversity that high-end restaurant customers seek. And Chef has more scale than small competitors," Mr. Beiley said. Its particularly strong second quarter came after a multiyear period of expansion that hurt profitability, he said.
Mr. Beiley also pointed out Fox Factory Holding Corp., a maker of suspension products for mountain bikes and off-road vehicles.
Its second-quarter performance was because its "move beyond their historic core high-end mountain bike products into other areas has been successful, especially off-road-capable trucks like Ford Raptor," Mr. Beiley said.