Morgan Stanley Investment Management's Inception strategy was the top-ranked separate account for the year ended March 31, with a gross return of 299.6%.
Inception is a small-cap growth strategy that "seeks high-quality companies with sustainable competitive advantages and focuses on long-term growth potential rather than short-term events," according to its Morningstar profile. The strategy as of March 31 had 41 holdings.
The top five holdings, which accounted for 25% of the portfolio, were Skillz Inc., AppFolio Inc., Utz Brands Inc., Cardlytics Inc. and Appian Corp. Other holdings include GameStop Corp. and Redfin Corp.
Dennis Lynch, New York-based head of Morgan Stanley Investment Management's counterpoint global team, was not available to provide further information.
Ranked second and fourth were strategies managed by Granahan Investment Management Inc., Waltham, Mass.
The Small Cap Select and SMID Select strategies posted gross returns of 271.02% and 252.39%, respectively, for the year ended March 31.
David Rose, chief investment officer and portfolio manager, said in a telephone interview that Granahan is a long-only growth manager that specializes in the small-cap universe.
"We focus on finding not only the growth companies that everyone knows well and loves, but also finding companies that are more hidden gems in the small-cap universe," Mr. Rose said.
The strategies maintain a diversification in the types of growth stocks in which they invest, categorizing them as pioneer companies (those with unique, disruptive potential in new markets), core growth companies (those with a consistent growth), and special situations companies (those with improving results, including cyclical growth companies).
While pioneer and core growth companies, often in technology, were the primary drivers for the first half of 2020, Mr. Rose said special situations companies have emerged as the economy rebounds. They include Kulicke & Soffa Industries Inc., which was the top holding in the strategy as of March 31, according to Morningstar.
The semiconductor provider has benefited from worldwide shortages and has seen orders pick up dramatically, Mr. Rose said.
Ranked at No. 3 for the year ended March 31 was DOMO Capital Management LLC, Germantown, Wis.
Its sole strategy, the Concentrated All Cap Value strategy, had a gross return of 262.3%. It held five stocks as of March 31.
Justin Dopierala, founder and president, said in a phone interview, "Basically our general philosophy is that increased diversification actually increases risk once you start allocating capital to ideas that are not your best ideas."
One stock that the strategy held in the past year and sold before its well-publicized trading frenzy earlier this year was video game retailer GameStop Corp., Mr. Dopierala said.
The stock was an example of what he calls a "perfect example of recency bias" resulting in low valuations.
"There was too much emphasis (in recent years) that their deteriorating income was due to a shift from physical to digital," he said.
Mr. Dopierala said they bought shares in GameStop in the low single digits over the course of the last several years, and while the poor performance hurt the strategy's results for a while, they sold their last share in the company in the low 40s.
Ranked fifth was a value strategy from Anchor Capital Advisors LLC, Boston. The Anchors Founders Value Institutional strategy returned a gross 232.95% for the year ended March 31.
William P. Rice, CEO, said in a phone interview that the firm, founded by his father nearly 40 years ago, has always adhered to a value philosophy.
"We have an 11-person investment team and our style, you know, really is to look for undervalued companies and partner with them for the very long term," Mr. Rice said. "We're an ultra-low-turnover manager. Historically our turnover has been around 2% to 5%."
The Founders Value strategy is the newest for the manager, created four years ago after Mr. Rice and his team realized so many of the companies in which they invested were still led by their founders.
"We build relationships with these management teams and really find the best of the best and take concentrated positions for the long term and what's so great about it is, generally speaking, the largest shareholder of these companies in almost all cases is the founder," Mr. Rice said.
"They're very, very much aligned with us as shareholders, which we think is so powerful." Mr. Rice also noted these kinds of companies benefit from being risk-averse, avoiding debt and keeping net cash on their balance sheets.
"This is their money. This is their life. They've got all their eggs in one basket," Mr. Rice said.
One primary driver for the success of the strategy was Celsius Holdings Inc., a fitness drink company in which the strategy was invested for four years whose fundamentals were excellent, Mr. Rice said.
"It was growing like crazy but the stock wouldn't budge, and we kept our head down," Mr. Rice said. "All of a sudden last year it got noticed and people realized what they'd been doing for four years."
For the five years ended Dec. 31, seven of the top 10 strategies were all growth strategies. Two other strategies fell within Morningstar's technology category, and one fell within its health category.
One of those technology strategies was ARK Investment Management LLC's Next Generation Internet strategy, which had an annualized gross return of 54.11% in the five years ended March 31. The New York-based manager had three other strategies in the top 10 for the five years ended March 31: its Disruptive Innovation Full Composite, Genomic Revolution and Disruptive Innovation Strategy SMA ranked sixth, ninth and 10th, respectively, with respective annualized gross returns of 43.28%, 41.32% and 40.53%.
Morgan Stanley's Inception strategy ranked second for the five years ended March 31 with an annualized gross return of 45.66%, followed by Next Century Growth Investors LLC's Microcap Growth Strategy, which returned an annualized gross 44.83%, and then Granahan's Small Cap Focused Growth and Small Cap Select strategies with annualized gross returns of 44.59% and 44.54%, respectively.
The median five-year annualized return for domestic growth strategies in Morningstar's domestic equity separate account universe was 19.39%, and the median among all domestic equity strategies was 14.97%. The Russell 3000 Growth index returned an annualized 20.9% for the five years ended March 31, and the Russell 3000 index returned an annualized 16.6%.
Within the collective investment trust universe, eight of the top 10 domestic equity CITs were small-cap strategies and two were midcap strategies for the year ended March 31. Of the top 10, there were four growth strategies, four value strategies and two blended strategies.
Leading all trusts was Hood River Capital Management LLC's small/midcap growth CIT founder's class, which returned a net 121.64% for the year ended March 31.
The rest of the top five CITs for the year ended March 31 were: Jennison Associates LLC's U.S. small-cap equity trust 6 class, with a net return of 121.49%; Wellington Management Group LLP's CIF II select small-cap growth CIT, a net 109.32%; American Century Investment Services Inc.'s U.S. small-cap value equity CIT, 108.7%; and Brandywine Global Investment Management LLC's diversified small-cap select BIT trust, 107.63%.
The median return of domestic equity collective investment trusts in Morningstar's universe for the year ended March 31 was 65.96%.
For the five years ended March 31, T. Rowe Price Group Inc.'s New Horizons Class A CIT led all trusts with an annualized net return of 26.81%, followed by the BNY Mellon U.S. small/midcap growth equity CIT, with a net 25.91%.
The rest of the top five CITs for the five years ended March 31 were: State Street Global Advisors' Nasdaq 100 Index Class A CIT, with an annualized net return of 25.23%; AllianceBernstein LP's U.S. small & midcap growth equity CIT class B, an annualized net 24.04%; and Wellington Management's CIF II growth CIT Class S2, 23.82%.
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 4.
