Growth strategies take trophy for year

Large and midcap growth strategies dominated the top-performing U.S. equity strategies offered as collective investment trusts for the year ended Dec. 31.

Among domestic fixed income CITs, corporate and long-term bond strategies were the top performers, according to data provided by Morningstar Inc., Chicago.

Five of the 10 top-performing domestic equity CITs were large-cap growth strategies last year, while four were midcap growth strategies, and one a large blend strategy holding a mix of U.S. stocks.

A midcap growth strategy managed by Principal Global Investors LLC, Des Moines, Iowa, led the pack. The PGI CIT Mid-Cap Equity Fund had a net return of 43.41% for the year ended Dec. 31, Morningstar data found.

In comparison, the Russell MidCap Growth index returned 34.33% for the year. Across Morningstar's universe of domestic equity CITs, the median return was 28.92%.

Bill Nolin, a co-portfolio manager on the PGI fund, who is also the CIO of Aligned Investors, an investment boutique within Principal Global Investors, said top-performing portfolio companies in the strategy were Hilton Worldwide Holdings Inc., the global hospitality company headquartered in McLean, Va., which was up 55% in 2019, and TransDigm Group Inc., a Cleveland-based aerospace company, which was up 85% last year.

A Principal Global Investors' large-cap growth strategy, PGI CIT Blue Chip Equity Fund, was No. 5 among domestic equity CITs, with a net return of 38.84% for the year.

The U.S. equity CITs in second, third and fourth place were, respectively: Wellington Management Group LLP's CIF II Growth S2, which returned 42.08% for the year; BNY Mellon Investment Management's U.S. Small/MidCap Growth Equity fund, which returned 39.82%; and State Street Global Advisors' Nasdaq-100 Index CIT, which returned 39.47%.

For the five-year period ended Dec. 31, all but one of the top 10 performers were large-cap growth CITs.

T. Rowe Price Associates Inc.'s New Horizons, the only midcap growth strategy in the top 10, ranked No. 3 in the five-year performance group, with an annualized net return of 16.32%.

An index fund, State Street Nasdaq-100 Index CIT, was the No. 1 strategy among domestic equity CITs for the five years ended Dec. 31, Morningstar data showed. The strategy had a net return of 16.89% for the period.

In comparison, the Russell 1000 Growth Index had an annualized net return of 12.98% over the five-year period. Across Morningstar's universe of domestic equity CITs, the median return was 9.5%.

Lynn S. Blake, an executive vice president at State Street Global Advisors and CIO of global equity beta solutions, said the Nasdaq-100 index fund has performed well over the one- and five-year period with the help of its largest holdings, which include tech companies Apple Inc., Amazon.com Inc., Facebook Inc. and Alphabet Inc.

In addition to the IT sector, the fund also has a heavy exposure to communication services companies, Ms. Blake said.

Alec Lucas, a senior manager research analyst at Morningstar, said the U.S. equity market spoke a resounding message last year: "The bigger you were, the better you did, and growth companies outperformed value."

Apple's market cap increased $541 billion during 2019, reaching $1.29 trillion as of late December, he added. "If you didn't like Apple or didn't own Apple, that would play a very big part in your performance that year," Mr. Lucas said of strategies judged against the S&P 500 last year. The same was true of other top-performing stocks like Microsoft Corp. or Facebook, he added.

For the five-year period ended Dec. 31, the U.S. equity CITs in second, fourth and fifth place were, respectively, Wellington's CIF II Growth S2, which returned 16.8%; the MFS Investment Management Inc.'s Growth Equity CIT Class 1 fund, which returned 16.11%; and the T. Rowe Price Blue Chip Growth Tr-T1 fund, which returned 15.34%.

In Morningstar's domestic fixed-income CIT universe, Wellington's CIF II U.S. Investment Grade Corporate Long Bond fund was the No. 1 performer for the year ended Dec. 31. The strategy had a net return of 24.69% for the year, while the median strategy in this universe had a net return of 8.71%.

During the year ended Dec. 31, the Bloomberg Barclays U.S. Corporate Bond Index returned 14.54%.

Scott St. John, a senior managing director at Wellington and portfolio manager on the top-performing corporate bond fund, said in an email that the firm saw last year "a reversal across risk assets as the Fed pivoted to reassure the market that they would remain accommodative to support economic growth."

"The investment-grade long corporate market, in turn, posted double-digit returns, fueled by sharp declines in both long-term U.S. Treasury yields as well as tightening credit spreads," he added.

The portfolio management team at Wellington "identified meaningful opportunities in certain BBB-rated issuers in the food and beverage, tobacco and communications sectors of the market in early 2019, despite headlines surrounding the perceived risk of these issuers," Mr. St. John wrote.

Among the top 10 domestic fixed income CITs, five were corporate bond strategies, four long-term bond strategies and one was a long government strategy.

For the year ended Dec. 31, U.S. fixed-income strategies in the No. 2 through No. 5 places were, respectively: Northern Trust Asset Management's Long Term U.S. Corporate Bond Index Fund, which returned 23.9% for the year; the State Street U.S. Long Credit Bond Index Fund, which returned 23.51%; Northern Trust's Long Term Credit Bond Index Fund, which returned 23.48%; and BlackRock Inc.'s Long Corporate Bond Index, which returned 23.47%.

For the five years ended Dec. 31, the top 10 lineup included a mix of four high-yield bond strategies, three corporate bond strategies and three long-term bond strategies.

A high-yield bond CIT managed by DDJ Capital Management LLC was the No. 1 in this group. The DDJ Total Return Credit I Composite had an annualized net return of 7.03% for the five-year period, while the Bloomberg Barclays U.S. Corporate High Yield Total Return Index had annualized returns of 6.13%.

The median domestic fixed-income CIT strategy returned 3.25% over the five years ended Dec. 31.

Benjamin J. Santonelli, a portfolio manager on the DDJ bond strategy, said that the CIT "focuses on the lower tier of the middle market, and tends to have a high allocation to CCC-rated bonds," which didn't perform well in 2019.

"It's a buy-and-hold strategy. If we hold these securities to maturity, there is a pretty strong alpha generation in this portfolio," he said, noting the five-year outperformance.

For the five years ended Dec. 31, the U.S. fixed income CITs in the No. 2 through No. 5 spot were, respectively, Wellington's CIF II U.S. Investment Grade Corporate Long Bond fund, which returned 6.69%; the State Street U.S. Long Credit Bond Index, which returned 6.48%; the BlackRock Long Corporate Bond Index fund, which returned 6.36%; and the Northern Trust Long Term Credit Bond Index fund, which returned 6.34%.

Regarding investments in CIT vehicles, Jeb B. Doggett, a Darien, Conn.-based managing director at Casey Quirk, a practice of Deloitte Consulting LLP, New York, said that institutional interest is "broadly in the 401(k) market," given that CITs are a lower-cost commingled vehicle. "That's probably the biggest source of asset growth and opportunity (for managers)," Mr. Doggett said of 401(k) plans.

Hans Vander Plaats, managing director, client portfolio manager at PGI's Aligned Investors, said in an email that, similar to a mutual fund, the firm's CITs provide "daily liquidity for multiple participants, but they tend to have fee structure that are slightly discounted compared to their mutual fund equivalents."

Over the year ended Dec. 31, universe-level assets in U.S. CITs increased 6% to $2.64 trillion, according to data provided by Morningstar Direct. Some $889.7 billion in assets were in U.S. equity CITs as of Dec. 31, while $625.5 were in U.S. fixed income CITs, the data showed.

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 released Feb. 5.