Large-cap equity, short-term bond funds on top

Among domestic equity and fixed-income strategies, the top performers offered as collective investment trusts were mostly large-cap growth equity and short-duration bond strategies for the year ended Dec. 31, according to Morningstar Inc.'s database of CITs.

Seven of the top 10 domestic equity CITs were large-cap growth strategies, while two were small-cap growth strategies. One midcap growth strategy landed on the list for the year ended Dec. 31.

In the top 10 among domestic fixed-income CIT strategies, eight were short-term bond funds, while the remaining two strategies were intermediate-term and high-yield bond strategies.

Institutional investors have shown interest in CITs "because they are cheaper, they don't have the same reporting requirements (as other vehicles) and (managers) can customize the fees," said Tony Thomas, manager research analyst, equity strategies at Morningstar, Chicago.

CITs, for instance, are not regulated by the U.S. Securities and Exchange Commission, and have lower marketing and compliance-related costs as they are not required to disclose monthly performance and portfolios, like mutual funds, according to a Morningstar online FAQ on CITs. These investment vehicles are supervised by the Office of the Comptroller of the Currency, however.

Fee customization for institutional investor clients, in particular, "gives (managers) some advantages (as) you are seeing so much litigation about fees and retirement plans," in the marketplace, Mr. Thomas noted.

Morningstar's universe of CIT assets was an estimated $2.4 trillion as of June 30, according to Mr. Thomas.

Cerulli Associates Inc., Boston, found that nearly all CIT providers, or 92%, cited investor demand for low-cost vehicle options as "very important" considerations in the development and distribution of CITs, its survey conducted throughout the first half of last year found.

Twenty-six CIT providers representing nearly $2.3 trillion in CIT assets participated in the survey.

Of note, the majority of flows into CIT strategies have come from defined contribution plans, said James Tamposi, a research analyst in Cerulli's institutional practice.

More than 90% of flows to large firms, those having more than $50 billion in collective investment trust assets, were attributed to DC plans, Mr. Tamposi said.

Similar to 2017, last year "was still generally a favorable market for large-cap growth strategies," Mr. Thomas said. "In the first half of the year, (markets were) generally favorable to small cap," but these strategies "took a beating in the fourth quarter relative to large cap," during a period of higher volatility, he explained.

Kayne Anderson Rudnick Investment Management LLC's Small-Cap Sustainable Growth CIT, however, stood as an outlier within the top 10 domestic equity performers. In the No. 1 spot, the small-cap growth strategy had a net return of 13.51% for the 12 months ended Dec. 31.

In comparison, the No. 2 strategy in Morningstar's domestic equity universe of CITs — the Wells Fargo/T. Rowe Price Institutional Large-Cap Growth Managed CIT — pulled in a net return of 4.51% during the same period.

Morningstar's median return for domestic equity CITs was -6.75% for the year. During the same period, the Russell 3000 Growth index benchmark returned -2.12%, while the Russell 3000 index returned -6.99%.

Regarding the Kayne Anderson strategy, the firm's strengths were that it "does tend to pick higher quality smaller companies that turn pretty good profits and many of them are lower debt," Mr. Thomas said. "That strikes me as having worked to their advantage."

Pensions & Investments reached out for comment to Kayne Anderson's investor relations team, including Gracie B. Hanson, the director of investor communications, who is also on the client relations marketing team. The firm did not respond by press time.

Top-performing companies in the fund were Fox Factory Holding Corp., a maker of recreational vehicles based in Scotts Valley, Calif., and Chefs' Warehouse Inc., a specialty food distributor in Ridgefield, Conn, Mr. Thomas said.

"(Kayne Anderson was) overweight tech on the whole, about 50% more than their benchmark," Mr. Thomas said. "When I looked at the number for the year, they did so well with consumer names (like Fox Factory and Chefs' Warehouse). That's been a good place to be with small-cap companies, with all of the talks about tariffs and international trade. The thought has been that these companies are less affected by that because they may do a lot more of their business stateside."

While smaller companies can offer investors a chance for a bigger payoff, with the right stock pickers, "usually it's going to come at a cost of higher volatility," Mr. Thomas added.

The remaining top five CIT performers in Morningstar's domestic equity universe for the 12 months ended Dec. 31, were T. Rowe Price New Horizons, a small-cap growth strategy ranked third with a net return of 3.87%; MFS Growth Equity CIT Class 1, a large-cap growth strategy managed by MFS Investment Management, with a net return of 3.36% ranking fourth; and Principal Global Investors' PGI CIT Blue Chip Equity Fund, with a net return of 3.23% for the year.

T. Rowe Price Group Inc., Baltimore, the subadviser for the No. 2-ranked strategy, Wells Fargo/T. Rowe Price Institutional Large-Cap Growth Managed CIT, also ranked second in the five-year performance group with an annualized 12.35% net return for the five years ended Dec. 31.

Ronald Taylor, a portfolio specialist within the U.S. equity group at T. Rowe Price who works with team that manages the strategy, said longer-term outperformance of the fund can be attributed in part to the team's "outstanding stock selection in investing in large-cap companies that are in many cases disruptive … (and catching them) early in terms of their growth cycles."

Amazon.com Inc., Seattle, is the largest holding in the portfolio, and has been in the fund since 2006, while other top-performing companies were Intuitive Surgical Inc., a Sunnyvale, Calif.-based company developing robotic-assisted, surgical procedure technologies, and Boeing Co., Chicago, Mr. Taylor added.

The No. 1 domestic equity CIT strategy for the five years ended Dec. 31 was a State Street Nasdaq-100 Index CIT, a large-cap growth strategy with an annualized net return of 13.31%.

The index fund replicates the Nasdaq 100 index, but excludes financial stocks, and is often used as a technology fund for investors, as this sector makes up a large weight of that index, according to Heather Apperson, a New York-based vice president and senior portfolio strategist in the global equity beta solutions group at State Street Global Advisors.

"(The fund) also has exposure to the communications and consumer discretionary sectors … that's another 40% of the index," Ms. Apperson said of non-tech companies in the fund.

The remaining top five equity strategies in the CIT universe for the five-year period were all large-cap growth strategies: the T. Rowe Price Blue Chip Growth, with an annualized net return of 11.41%, ranking third; Wellington Management Co.'s CIF II Growth, fourth at 11.33%, and BlackRock Inc.'s U.S. Fundamental Large-Cap Growth, 10.61%.

Morningstar's median return for domestic equity CIT strategies for the five years ended Dec. 31 was 6.69%. During the same period, the Russell 3000 Growth index returned 9.99%, while the Russell 3000 index returned 5.84%.

Within fixed income, CITs attracting the most flows were intermediate bond, long government bond and inflation-protected strategies, which might have been an investor response to rising interest rates through much of last year, Mr. Thomas said.

However, among the top-performing CIT managers within domestic fixed-income strategies, DDJ Capital Management LLC, Waltham, Mass., took the No. 1 spot with its DDJ Total Return Credit I Composite for the year ended Dec. 31, Morningstar data show. The strategy was the only high-yield bond strategy in the top 10, with a net return of 4.55% for the year.

"The overall philosophy for this portfolio is to have a significant yield premium vs. the market, and to do so by incurring default losses less than the market," said David J. Breazzano, co-founder, president and chief investment officer of DDJ.

"We do this by focusing on inefficient areas of the U.S. credit market, such as middle market and smaller deals and somewhat more complicated transactions," Mr. Breazzano added.

Morningstar's median return for domestic fixed-income CIT strategies for the year ended Dec. 31 was -0.38%. Meanwhile, the Bloomberg Barclays U.S. Aggregate Bond index returned 0.01% for the year.

The remaining domestic fixed-income CITs in the top five were Washington Capital Management Inc., Seattle, whose Mortgage Income short-term bond strategy had a net return of 2.98%; BlackRock Target Maturity 2019, an intermediate-term bond strategy with a net return of 1.87%; American Century Investment Management Inc.'s Cash and Cash Equivalent ultrashort bond CIT, 1.86%; and BlackRock's 1-3 Year Government Bond Index fund, which had a net return of 1.72%.

For annualized CIT net returns over the five years ended Dec. 31, BlackRock and State Street dominated, taking the Nos. 1 through 5 spots on the list of top performers, with long-duration government bond strategies: BlackRock 20+ Treasury Bond Index fund (net return of 6.47%), BlackRock 20+ Treasury Bond fund (6.46%), State Street U.S. Long Treasury Index fund (6.01%), BlackRock Long Term Government Bond Index fund (5.93%) and State Street U.S. Long Government Bond Index fund (5.9%).

For the five years ended Dec. 31, Morningstar's median return for domestic fixed-income CITs was 2.76%. During this period, the Bloomberg Barclays U.S. Aggregate Bond index returned 2.52%.

All data for Pensions & Investments' top-performing managers report are provided from Morningstar's global separate account/collective investment trust database. The data for the rankings on which this story is based were pulled Feb. 4.n