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Special Report: Top-Performing Managers

Growth strategies take the spotlight for year ended March 31

Growth strategies dominate the top 10 overall domestic equity strategies for the year ended March 31

Updated with correction

Small-cap growth strategies took five of the top 10 spots among the top-performing domestic equity managers for the year ended March 31, according to data from Morningstar Inc.'s separate account/collective investment trust database.

Growth overall was dominant, with two midcap growth strategies and one large-cap strategy also present among the top 10.

In the previous quarter, large-cap growth accounted for seven of the top 10 strategies for the year ended Dec. 31.

Tony Thomas, senior manager research analyst, equity strategies at Morningstar Inc., Chicago, said in a telephone interview that the overall recovery in the first quarter from the miserable fourth quarter was "V-shaped, which in some ways benefits small caps. They really got hammered in the fourth quarter and in a way, led the charge back."

For the year ended March 31, the median return among overall domestic equity strategies was 5.3% in Morningstar's universe. The median return for the same period among growth strategies was 10.01%, while the median return for value strategies was 2.6%.

The Russell 3000 index returned 6.71% for the year ended March 31, while the Russell 3000 Growth and Russell 3000 Value indexes returned 10.64% and 2.66%, respectively.

By sector, technology was strong, Mr. Thomas said, particularly among software and semiconductor companies.

"I hear a number of managers talking about just the predominance of the prevalence of semiconductors in all of the amenities of daily life," Mr. Thomas said. "Some have a great confidence that's less of a cyclical business than it has been in the past."

Among the top 10, Mr. Thomas said it was interesting that many of the strategies seemed to be particularly concentrated.

Topping both the one-year and five-year list was Waltham, Mass.-based Granahan Investment Management Inc.'s Small-Cap Focused Growth strategy, which posted a gross return of 42.53% for the year ended March 31, and an annualized gross return of 20.43% for the five years ended March 31.

The top-performing managers: overall U.S. equity
One-year returnCategoryGross returnNet return
Granahan Small Cap Focused GrowthU.S. SA small growth42.53%41.32%
Crow Point Small Cap ConcentratedU.S. SA small growth33.37%33.07%
Morgan Stanley (MS) InsightU.S. SA large growth31.52%30.31%
ARK Genomic RevolutionU.S. SA health31.11%30.15%
Morgan Stanley DiscoveryU.S. SA midcap growth30.99%29.95%
Morgan Stanley InceptionU.S. SA small growth30.13%29.24%
Elemental Capital Small and Mid-Cap GrowthU.S. SA midcap growth29.35%26.91%
TFCM Israeli InnovationU.S. SA small growth29.23%27.85%
Crosspoint Accelerated GrowthU.S. SA tactical allocation27.97%26.90%
Macquarie U.S. Smid-Cap Growth EquityU.S. SA small growth27.86%27.05%
 
Five-year returnCategoryGross returnNet return
Granahan Small Cap Focused GrowthU.S. SA small growth20.43%19.66%
Columbia Global Technology GrowthU.S. SA technology20.35%19.17%
J.P. Morgan U.S. Technology Leaders - MAU.S. SA technology20.32%19.87%
RS Science And Technology CompositeU.S. SA technology20.00%18.82%
Morgan Stanley InsightU.S. SA large growth19.11%17.96%
Janus Henderson Global TechnologyU.S. SA technology19.06%18.29%
AllianzGI Global Technology EquityU.S. SA technology19.02%17.98%
Euclid Advisory Large Cap GrowthU.S. SA large blend18.48%17.05%
MFS Technology EquityU.S. SA technology18.31%17.45%
Wellington Global TechnologyU.S. SA technology18.12%17.25%

Drew Beja, senior vice president and managing director at Granahan, said in a telephone interview that the strategy invests in "desert island" companies that one would want to bring with them to a desert island and see increase significantly in value over the following five to 10 years.

The strategy, Mr. Beja said, has benefited specifically over the past year from very careful valuations. Stocks sold in the second quarter and third quarter of 2018 helped protect the strategy from the rough fourth quarter, enabling the firm to "buy some desert-island-worthy companies at low cost."

By industry, Mr. Beja said the strategy has benefited from companies who deliver their services through the cloud.

"They're very, very diverse in terms of their end markets," Mr. Beja said. Those companies include Etsy Inc. and Paycom Software Inc.

Ranked second was Crow Point Partners LLC's Small Cap Concentrated strategy, which returned a gross 33.37% for the year ended March 31.

Alan Norton and Thomas Norton, Boston-based co-portfolio managers with Cold Creek Capital Inc., the strategy's subadviser and an affiliate of Crow Point, said in a telephone interview that the concentrated strategy is a kind of best-of the small-cap and midcap growth strategies they also manage.

"This portfolio is designed to hold between eight and 15 names," Alan Norton said. "The underlying theory is to have the highest conviction names that we follow in the portfolio. We run more diversified small- and midcap strategies although they're relatively concentrated. We run with around 50 names on those strategies."

"The names are the best-of-the-best ideas," said Alan Norton. "What it does is turn a lot of portfolio theory on its head — no sector constraints, we throw out the typical 5% position."

Among the best of the best were Exact Sciences Corp., which provides at-home tests for colorectal cancer screenings, and Rapid7 Inc., a technology company that provides vulnerability management for IT executives. Rapid7, Alan Morton said, has seen strong performance since it changed its product to a subscription model from a licensed-term model.

Morgan Stanley (MS) Investment Management Inc., New York, followed with not only the third-ranked strategy, but the fifth and sixth as well, all growth strategies.

Ranked third, the Insight strategy returned a gross 31.52% for the year ended March 31, and at fifth and sixth the Discovery and Inception strategies had gross returns of 30.99% and 30.13%, respectively.

Dennis Lynch, Morgan Stanley managing director and head of counterpoint global, said in a telephone interview the general objective of all the strategies is "to invest in companies we think have the ability to be significantly larger in the future for fundamental reasons."

Insight is a strategy that invests in "companies that whether they're small, mid or large go anywhere from a market cap perspective, primarily in the U.S. and we've been doing that for something close to 17 years," Mr. Lynch said. Discovery and Inception, meanwhile, concentrate on midcap growth and small-cap growth companies, respectively.

Insight has gone through a bit of a transition in recent years, Mr. Lynch said.

"We have ... started to add more companies in the small- and midcap range because there were some compelling long-term opportunities there, especially in software," he said.

He cited the overperformance of all the strategies on stocks they've held for a long time in areas like software.

"Some of these software companies that tend to deliver to their end users through subscription-based models really went through a rough patch (a few years ago), not necessarily for fundamental reasons, but some uncertainty with other investors on how big those companies could be," Mr. Lynch said.

One standout in the past year has been Twilio Inc., a company they've owned for a while, he said. The company provides a communication platform as a service, which is very popular with the developer community. "Twilio enables communications such as the alerts for when your ride-sharing vehicle will be arriving," Mr. Lynch said.

Ranked fourth was ARK Investment Management LLC's Genomic Revolution strategy, which returned a gross 31.11% for the year ended March 31.

The strategy, which went live in October 2014, was "borne out of our analysis that a key innovation platform was evolving and hitting prime time: DNA sequencing," said Catherine Wood, CEO and chief investment officer, in a telephone interview.

"Nearly 20% of (gross domestic product) is devoted to health care, which is more than double most other nations," Ms. Wood said. "We can say we think more than half of all of those dollars is wasted and less than half work as designed. I say that it's not just pharmaceuticals but surgeries, laboratory tests and so forth. Now with DNA sequencing and other new tech like gene editing ... we're going to be able to cure disease because we're going to understand which genes are implicated."

Ms. Wood said this kind of strategy was under a bit of a cloud in 2016 and 2017, but the dropping cost of DNA sequencing is bringing more players to the field and making reimbursements more attractive, improving the performance of many of the companies in the portfolio. This includes companies such as CRISPR Therapeutics AG and Invitae Corp.

Expertise in the team runs beyond just investing, Ms. Wood added. Simon Barnett and Manisha Samy, the strategy's analysts, have backgrounds in chemical and bimolecular engineering and biotechnology, respectively.

For the five years ended March 31, the remaining top five managers behind Granahan's strategy, were: Columbia Threadneedle Investments' Global Technology Growth strategy, which returned an annualized gross return of 20.35%; J.P. Morgan Asset Management (JPM)'s U.S. Technology Leaders strategy, at 20.32%; Victory Capital Management Inc.'s RS Science and Technology composite, at 20%; and Morgan Stanley Investment's Insight strategy, at 19.11%.?

For the five years ended March 31, the median annualized return for domestic equity strategies was 8.64%, while growth and value strategies returned an annualized median 10.78% and 7.58% respectively.

Among collective investment trusts, real estate investment trusts dominated for the year ended March 31, with six of the top 10 CITs, led by State Street Global Advisors' REIT index trust, which returned a net 19.78% for the period.

The remaining top five were: BlackRock (BLK) Inc. (BLK)'s real estate securities CIT, which returned a net 19.77%; Mellon Investments' NSL REIT index CIT, 19.67%; Fidelity Institutional Asset Management's U.S. REIT CIT, 18.94%; and American Century Investments' U.S. real estate securities trust, 18.63%.

For the year ended March 31, the median return for overall domestic equity CITs in the Morningstar universe was 5.79% while the median returns for growth and value CITs were 10.7% and 3.33% respectively.

For the five years ended March 31, the top-performing collective investment trust was SSGA's Nasdaq-100 index CIT, which returned an annualized net 16.8%. The rest of the top five were: Wellington Management Co. LLP's CIF II Growth trust, with an annualized net 15.16%; T. Rowe Price Group Inc.'s Blue Chip Growth trust, 15.05%; BlackRock's U.S. fundamental large-cap growth trust, 14.62%; and T. Rowe Price's New Horizons CIT, 14.33%.

The median annualized return among domestic equity CITs in the Morningstar universe for the five years ended March 31 was 8.52%, while the growth and value annualized median returns for the period were 10.86% and 7.55% respectively.

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 May 7.