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  2. Special Report: Top-Performing Managers
November 11, 2019 12:00 AM

REIT strategies take top-performing mantle in third quarter

Rob Kozlowski
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    Publicly traded real estate securities strategies dominated the top domestic equity strategies list for the year ended Sept. 30, taking seven of the top 10 spots, according to data from Morningstar Inc.'s separate account/collective investment trust database.

    None of the managers featured in the previous quarter's top 10 list made a return trip for the current quarter.

    Large-cap growth stocks topped the list for the year ended June 30, taking six of the top 10 spots.

    The disappearance of traditional public equities from the top 10 list could be attributed to the intersection of the major sell-off in the fourth quarter of 2018 and a particularly volatile third quarter, said Tony Thomas, senior manager research analyst for equity strategies at Morningstar, Chicago, in a telephone interview.

    Real estate investment trusts, meanwhile, enjoyed an exceptional year.

    For the year ended Sept. 30, the FTSE Nareit All REITs index returned 20.7%, while the S&P 500 was up 2.15%.

    In the Morningstar universe, the median return among overall domestic equity categories was 0.84%, while strategies within the U.S. real estate category returned a median 19.13%. The median return among domestic growth equity managers for the year ended Sept. 30 was 1.23%.

    Among REIT strategies, those strategies that go beyond the traditional categories of residential, commercial and retail real estate were top performers, Mr. Thomas said.

    Companies that invest in more technology-focused real estate such as data centers and cellular towers, for example, had excellent years, he said. It may be changing the way investors are thinking about REITs.

    "(Traditionally) you think about location," he said. "In (these cases) you're thinking about the entity you're owning and the access to the network that you're providing people."

     

    Adelante on top

    Adelante Capital Management LLC's NewCORE strategy led the overall domestic equity strategy category for the year ended Sept. 30, with a gross return of 32.6%.

    The strategy, which debuted less than two years ago, emphasizes real estate securities that represent opportunities that are hard to find in private real estate markets, said Jeung Hyun, Oakland, Calif.-based principal and portfolio manager at Adelante Capital, in a telephone interview.

    Those opportunities include data centers and manufactured home communities.

    "The supply-and-demand picture is quite favorable for some of these property types," Mr. Hyun said. "It's hard to create new data centers. To a certain extent, the supply is pretty much held in check."

    The strategy's excellent performance is a combination of smart beta and very good stock selection, Mr. Hyun said.

    One holding that stood out this past year is Sun Communities Inc., which invests in land in supply-constrained markets and collects rent on the land from owners of trailers and recreational vehicles.

    Ranked second for the year ended Sept. 30 was Beck Bode Wealth Management LLC's Income Growth strategy, which returned a gross 27.24%.

    Benjamin Beck, co-managing partner and chief investment officer of the Dedham, Mass.-based firm, said in a telephone interview that the strategy focuses on future dividend growth.

    Mr. Beck said he's seen a lot of strategies focusing on past dividend growth and what occurred historically, which inspired the creation of this strategy.

    "We utilize some of the best institutional research out there to identify certain opportunities where there's (going to be) really evident, substantial dividend growth of the next 12 to 18 months," Mr. Beck said.

    The strategy is concentrated with no more than 15 holdings at any given time with an emphasis on utilities, he said. One particular standout has been NextEra Energy Inc., which has embraced alternative energy sources.

    "They are a leader in the space," Mr. Beck said. "They are in great economic and geographic areas. They are utilizing technology that's really expanding their opportunities and improving their operations."

    Neuberger Berman's REIT strategy ranked third, returning a gross 26.3% for the year ended Sept. 30.

    Brian Jones, New York-based managing director and portfolio manager in Neuberger Berman's real estate securities group, said the strategy's approach begins with a top-down analysis of individual real estate subsectors to determine where they want to be overweight and underweight.

    "We then isolate two or three economic indicators that closely tie to the underlying demands tied to each of the different real estate subsectors," Mr. Jones said.

    They then fill out those subsectors with "best-in-class REITs," Mr. Jones said.

    The portfolio is relatively concentrated with between 33 and 45 real estate companies with the aim of outperforming the FTSE Nareit All REITs index.

    Data centers and cellular tower REITs have performed particularly well for the strategy. He pointed out Equinix Inc. as a particular standout for the past year.

    "It is the largest data center REIT globally and they have a significant portfolio of data centers both in the U.S. and globally," Mr. Jones said. "They've been benefiting from cloud computing trends."

    Ranked fourth and fifth are strategies managed by Cohen & Steers Inc., New York.

    The manager's U.S. Realty Total Return strategy returned a gross 25.79%, followed by its U.S. Realty Focus strategy, which returned a gross 24.71%, for the year ended Sept. 30.

    Jason Yablon, senior vice president and senior portfolio manager, said Total Return is the firm's flagship strategy, which reflects the firm's overall value-oriented philosophy and features about 40 to 50 holdings.

    The Focus strategy is a more benchmark-agnostic strategy, which Mr. Yablon said is the firm's "best idea" strategy, featuring roughly 20 holdings at any given time.

    "There have been huge bifurcations on returns depending on fundamentals and that's what enables active management in this market," Mr. Yablon said.

    He pointed to the continued struggles in the retail market as regional malls have performed very poorly for the last year as e-commerce companies continue to thrive. He also cited technology-oriented securities as an area of opportunity.

    Mr. Yablon would not provide details on individual holdings, but pointed to the subsector of single-family homes for rent as an area of opportunity because there is "not a lot of new single-family supply being put on the market for rent."

    "Things are mispriced and we have the opportunity to create alpha for our investors," he said.

     

    Five-year returns

    For the five years ended Sept. 30, technology-related strategies accounted for five of the top 10 separate accounts, led by ARK Investment Management LLC's ARK Next Generation Internet strategy, which returned an annualized gross 24.5% for the period.

    Catherine Wood, New York-based founder, CEO and chief investment officer of ARK Investment Management, said she founded the firm in 2014 to achieve long-term alpha through a focus on disruptive innovations including DNA sequencing, robotics and energy storage.

    This is the first quarter this strategy has had a five-year trailing return.

    The Next Generation Internet strategy typically holds between 35 and 45 stocks and concentrates on artificial intelligence and blockchain technology companies. The two top contributors to the success of the strategy over the past five years have been Grayscale Bitcoin Trust and NVIDIA Corp., she said.

    Ms. Wood said NVIDIA was primarily known as a gaming chip company, but she said "we learned that NVIDIA was the No. 1 player in the artificial intelligence training market."

    "At the time (in 2014) this stock was selling for a song," Ms. Wood said. "We put it in the portfolio when its market cap was somewhere between $6 billion and $10 billion. Today, it's $127 billion, so it's clear that it was inefficiently priced at the time."

    The rest of the top five strategies for the five years ended Sept. 30 were: Kayne Anderson Rudnick Investment Management LLC's Small-Cap Sustainable Growth strategy, which returned an annualized gross 24.11%; Granahan Investment Management Inc.'s Small-Cap Focused Growth strategy, 22.13%; J.P. Morgan Asset Management's U.S. Technology Leaders strategy, 20.35%; and Columbia Threadneedle Investments' Global Technology Growth strategy, 20.04%.

    The median annualized five-year return for overall domestic equity strategies in the Morninstar universe was 11.46%.

    Collective investment trusts

    The top 10 domestic equity collective investment trusts featured a greater variety of strategies than the separate account composite list. While four of the top five strategies were real estate investment trusts, the rest of the top 10 featured a variety of large-cap strategies.

    Among CITs, Fidelity Institutional Asset Management's U.S. REIT CIT was the one-year leader, returning a net 17.89%..

    Following the FIAM CIT, the rest of the top five was: Principal Global Investors' CIT midcap equity fund, which returned a net 16.51% for the year ended Sept. 30; State Street Global Advisors' REIT index CIT, 16.42%; BlackRock Inc.'s U.S. real estate securities index CIT, also a net 16.42%; and Mellon Investments' REIT index CIT, 16.3%.

    For the year ended Sept. 30, the median return for overall domestic equity CITs in the Morningstar universe was 2.33%

    Large-cap growth CITs comprised seven of the top 10 trusts, while midcap growth CITs made up the other three for the five years ended Sept. 30.

    T. Rowe Price Group Inc.'s new horizons CIT, which Morningstar classifies as midcap growth, topped that list with an annualized net return of 15.9% for the five years ended Sept. 30.

    The rest of the top five CITs for the five-year period were: Wellington Management Co. LLP's CIF II growth trust, with an annualized net 15.7%; MFS Investment Management's growth equity CIT, 15.4%; State Street Global Advisors' Nasdaq 100 index CIT, 15.16%; and William Blair & Co.'s small-midcap growth CIT, 14.28%.

    The median annualized return among domestic equity CITs in the Morningstar universe for the five years ended June 30 was 8.95%.

    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. 1.

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