Growth strategies continue to lead the way for top managers

Growth strategies — particularly large-cap growth — continue to dominate the top-performing domestic equity strategies on Morningstar Inc.'s separate account/collective investment trust database, with seven of the 10 best performing U.S. equity funds for the year ended Sept. 30 falling under the category.

Morningstar's data show that five of the top 10 strategies were large-cap growth and two were midcap growth. Two other strategies fell within Morningstar's technology category — both of which topped the list — and one fell within the health category.

For the year ended June 30, seven of the top 10 strategies also were growth strategies.

For the year ended Sept. 30, the median return for domestic growth strategies was 22.76% in Morningstar's universe, while the Russell 3000 Growth index returned 36.12%. The overall median return for domestic equities within the Morningstar separate account universe was 5.28% for the year ended Sept. 30, compared to the Russell 3000 index return of 14.99%.

"Large-cap growth has performed exceptionally well over the past four years," said Tony Thomas, senior manager research analyst for equity strategies at Morningstar, noting that the Russell 1000 Growth index has beaten the S&P 500 13 out of the last 15 quarters. "It's astonishing."

Although growth strategies had been performing well for some time, the coronavirus pandemic accelerated trends that made the top overall firms perform exceptionally well, with all top 10 strategies experiencing triple-digit gross gains for the 12 months ended Sept. 30.

During the economic shutdown caused by the coronavirus pandemic starting in March, many investors have been asking where they can find growth. The answer? Innovative technologies, innovative health-care treatments, and innovative communications tools.

"Tesla was up 98% in the third quarter," Mr. Thomas said, citing an example of a technology stock that performed exceptionally well. "It's in four of the top five equity portfolios."

The Morningstar analyst also pointed out that many of the big winners this time around had already been in the right spots in the market before the pandemic — it wasn't a case of managers chasing hot stocks.

"The pandemic has favored spots that these investors were already investing in," Mr. Thomas said. "Zevenbergen have been big on Tesla for a long time."

Indeed, Anthony Zackery, portfolio manager at Zevenbergen Capital Investments LLC, whose Genea growth strategy topped the list with a gross return of 125.72% for the 12 months ended Sept. 30, told Pensions & Investments that Tesla was the "most significant contributor to performance."

Mr. Zackery confirmed Mr. Thomas' points that the pandemic caused many sectors in which Zevenbergen has invested for years to thrive.

"We did not expect the pandemic, nor did we expect this health crisis would cause a recession," Mr. Zackery said. "But we also didn't expect it would lead to enthusiasm for high-tech companies investing in durable trends. We've been investing in these companies for years."

Zevenbergen Capital has significant exposure to digital and cloud-based technology, which experienced increased adoption in the health-care, entertainment, retail and education sectors.

In addition to Tesla, other strong performers in Zevenbergen's growth strategy included e-commerce provider Shopify Inc., technology company Nvidia Corp. and online real estate database firm Zillow Group Inc.

Zevenbergen's growth equity strategy ranked fifth on the list, returning a gross 113.91% for the year ended Sept. 30. The firm's Genea growth strategy also ranked second for the list of top performers for the five years ended Sept. 30, returning a gross 37.02%.

ARK Investment Management LLC had both the second- and third-ranked domestic equity strategies for the year ended Sept. 30.

Ranked second was the ARK Next Generation Internet strategy, which returned a gross 124.7%, while ARK's Genomic Revolution strategy came in third, returning a gross 123.74%.

The Next Generation Internet strategy is also the top performer for the five years ended Sept. 30, with an annualized gross return of 44.27%, while its Disruption Innovation strategy ranked third, returning a gross 36.28% for the five years ended Sept. 30.

Renato Leggi, client portfolio manager at ARK Investment Management, attributed its success to the firm's "focus on innovation," which he believes "should be a strategic allocation in investors' portfolios."

"We've been investing in these companies prior to the coronavirus," Mr. Reggi said. "We're focused on innovation ... (which) gains traction in tumultuous times."

Mr. Leggi said that the top contributors to Next Generation Internet's performance were Tesla, online payment company Square Inc. and Zillow. Top performers for the Genomic Revolution strategy were molecular diagnostic company Invitae Corp., pharmaceutical firm Arcturus Therapeutics Holdings Inc. and drug development company Compugen Ltd.

"The world's moving very fast, technology's getting better," Mr. Leggi said, adding that the sectors of genome sequencing, artificial intelligence, robotics, energy storage and blockchain technology are all rapidly evolving simultaneously.

"We haven't seen this much innovation happening at once in over 100 years," he said.

Ranking fourth for the year was the Morgan Stanley Discovery strategy, which returned a gross 119.27%.

Dennis Lynch, head of Morgan Stanley Investment Management's counterpoint global team, said the firm seeks companies that "have the potential to be worth a lot more in the future than what they're being valued at now for fundamental reasons."

The strategy has "a fair amount of exposure to companies that have secular growth, like e-commerce, software-as-a-service (and) internet advertising."

"The shorter-term benefit we're fortunate to have received comes at an unfortunate time," Mr. Lynch said. "These secular growth trends have accelerated because of the unfortunate fact that we're in a pandemic. People are seeking greater cost efficiencies, and many of our companies offer their customers, users or clients greater cost and/or time efficiencies."

Noteworthy strong-performing stocks in the strategy include Zoom Video Communications Inc. and Shopify.

"We've been fortunate to benefit from companies that experienced growth," Mr. Lynch said. "The COVID tragedy accelerated a lot of trends already in place. The big question is, will these trends continue? Do they go back to doing the things the way they did beforehand, or do people understand the time- and cost-saving aspects the way they do things now provide?"

Morgan Stanley's discovery strategy ranked fifth among the top strategies for the five years ended Sept. 30, returning a gross 33.37%, while its Insight fund ranked fourth, returning a gross 35.22% for the five years ended Sept. 30.

The median five-year annualized return for domestic growth strategies in Morningstar's domestic equity separate account universe was 15.51%, and the median among all domestic equity strategies was 10.17%. The Russell 3000 Growth index returned an annualized 143.71% for the five years ended Sept. 30, and the Russell 3000 index returned an annualized 89.84%.

Within the collective investment trust universe, all top 10 domestic equity collective investment trusts for the one year and five years ended Sept. 30 were growth strategies.

The BNY Mellon U.S. small/midcap growth equity CIT, led all trusts with a net return of 57.51%. Jennison Associates' growth equity CIT came in second with a net return of 55.1%.

The State Street Global Advisors Nasdaq 100 index Class A CIT came in third with a net return of 48.92% for the year ended Sept. 30, while the SSGA Nasdaq 100 index Class M CIT ranked fourth, with a net return of 48.91%.

Rounding out the top five CITs for the year ended Sept. 30 was the T. Rowe Price Group Inc.'s New Horizons Class Z CIT, which returned a net 48.74%.

The median return of domestic equity CITs in Morningstar's universe for the year ended Sept. 30 was 8.49%.

For the five years ended Sept. 30, T. Rowe Price's New Horizons Class Z CIT led all trusts with an annualized net return of 24.58%, followed by T. Rowe Price's New Horizons Class D CIT with an annualized net 23.78%.

The rest of the top five CITs for the five years ended Sept. 30 were: T. Rowe Price's New Horizons Class A CIT, with an annualized net 23.77%; SSGA's Nasdaq 100 Index Class A CIT, 23.63%; and SSGA's Nasdaq 100 Index Class M CIT, 23.59%.

For the five years ended Sept. 30, the median annualized return for domestic equity CITs was 10.87%.

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 Nov. 3.