Small-cap growth dominated the list of top-performing equity strategies for the year ended Dec. 31 in Morningstar Inc.'s separate account database, while an ultrashort bond strategy held the top spot among one-year fixed-income returns, with five intermediate-term bond managers in the top 10.
Small-cap growth strategies claimed eight of the top 10 spots on the domestic equity list for the one-year period, with four returning from the list of top strategies for the year ended Sept. 30.
"I was intrigued to see how many of the names stayed on there," said Tony Thomas, manager research analyst at Morningstar in Chicago.
"Those growth stocks and tech stocks have done so well over those trailing one- and five-year periods. But a number of tech stocks took a beating in the fourth quarter. Volatility had an impact. Major indexes ended down. Oil prices dropped dramatically in the fourth quarter, making energy one of the worst-performing sectors. Some of the momentum trades that had done well went down sharply in the fourth quarter. But many managers say that presented them with opportunities," Mr. Thomas said.
The FAANG stocks — Facebook Inc., Amazon.com Inc., Apple Inc., Netflix Inc. and Google (Alphabet Inc.) — and large-cap technology growth stocks generally performed well during the five-year period, he said.
"It's interesting to see Microsoft back in the leaders. Tech has been an area for people who are interested in innovation and change without some of the risks to the downside facing biotechs, for example. Amazon, for example, continues to grow. They are engaging in a lot of different things. All of that could be attractive to an investor," he said.
A gross return of 25.6% put Waltham, Mass.-based Granahan Investment Management Inc.'s Small Cap Focused Growth strategy at the top of Morningstar's domestic equity list for the year ended Dec. 31.
The Granahan strategy moved up from second place on the list for the year ended Sept. 30.
"We like to invest in companies that can sustain 15-, 20-, 25% growth for several years," said Drew Beja, senior vice president and managing director at Granahan.
"We have a rigorous valuation discipline that we apply to the stocks of those companies ... there are a few sectors that are rich with sustainable growers, such as mobile computing, marketplaces, certain business service companies. And there are many sectors where there are very few sustainable growers — commodities, banks, energy, industrials, for example," Mr. Beja said.
He cited SodaStream International Ltd., which was acquired by PepsiCo Inc. in 2018, LivePerson Inc., which is developing a "conversational commerce" approach for brands to engage with consumers, and software provider Paycom, as notable contributors to the Focused Growth strategy's outperformance for the year.
But he noted "it was pretty broad-based. It really wasn't a single stock."
Small-cap growth strategies also occupied the next four spots on Morningstar's list of top-performing equity strategies.
Kayne Anderson Rudnick Investment Management LLC's Small-Cap Quality Select was in second place with a gross return of 25.24%; Kopp Investment Advisors LLC's Emerging Growth strategy followed in third place at 24.18%; fourth on the list was Next Century Growth Investors LLC's Micro Cap Growth strategy at 18.22%; and Crow Point Partners LLC's Small Cap Concentrated strategy was in fifth place, with a gross 16.32% return for the 12 months ended Dec. 31.
The median return for domestic growth equity strategies in Morningstar's universe was -3.47% for the one-year period, while the median return for Morningstar's overall domestic equity universe was -6.86%, with strategies in the domestic value and blend categories returning a median -9.86% and -11.86%, respectively.
The S&P 500 index had a total return of -4.38% and the Russell 2000 Growth index returned -9.31% for the year.