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  2. Special Report: Top-Performing Managers
August 24, 2020 12:00 AM

Technology stocks fuel boom for growth strategies

Rob Kozlowski
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    Catherine Wood
    ARK Investment Management's Catherine Wood

    Growth strategies once again made up the majority of top-performing domestic equity strategies for the year ended June 30, according to the latest data from Morningstar Inc.'s separate account/collective investment trust database.

    Among the top 10 strategies, five were large-cap growth strategies, one was midcap growth and one was small-cap growth, according to the data. Two strategies fell within Morningstar's technology category and one fell within the health category, both sectors that contributed to the success of many of the other strategies.

    For the year ended March 31, seven of the top 10 strategies were growth strategies.

    Tony Thomas, senior manager research analyst for equity strategies at Morningstar Inc., Chicago, said in a telephone interview that despite the extraordinarily volatile market in the first half of 2020 that resulted from the economic impact of the COVID-19 pandemic, many of the themes remain the same as before the pandemic.

    Growth strategies were performing strongly before the pandemic and they still are, he said.

    "Some people thought this would maybe be a chance for value to shine and maybe briefly it did, but not really. This is a large growth-led market," Mr. Thomas said.

    For the year ended June 30, the median return for growth strategies was 11.24% in Morningstar's universe, while value strategies returned a median -8.79%. The Russell 3000 Growth index returned 21.7% for the year ended June 30, while the Russell 3000 Value index returned -9.4%.

    The overall median return for domestic equities within the Morningstar separate account universe was 0.34% for the year ended June 30, compared to the Russell 3000 index return of 6.5%.

    The top-performing equity managers
    Overall U.S. equity separate accounts: one year
    RankFundCategoryGross returnNet return
    1ARK Next Generation InternetU.S. SA technology64.06%62.83%
    2Morgan Stanley DiscoveryU.S. SA midcap growth58.55%57.28%
    3ARK Genomic RevolutionU.S. SA health56.85%55.71%
    4Zevenbergen Growth EquityU.S. SA large growth56.40%55.85%
    5TFCM Israeli InnovationU.S. SA small growth55.54%53.97%
    6Baillie Gifford US Equity GrowthU.S. SA large growth50.71%49.92%
    7ETCM Leading Innovators Focused Gr InstU.S. SA large growth50.50%49.44%
    8Morgan Stanley InsightU.S. SA large growth50.26%48.68%
    9LEIA CBIU.S. SA large growth48.32%48.32%
    10Zevenbergen Genea GrowthU.S. SA technology48.10%46.79%
    Overall U.S. equity separate accounts: five years
    RankFundCategoryGross returnNet return
    1ARK Next Generation InternetU.S. SA technology35.23%34.24%
    2Zevenbergen Genea GrowthU.S. SA technology28.35%27.21%
    3Morgan Stanley InsightU.S. SA large growth28.16%26.90%
    4Azzad Small Cap GrowthU.S. SA small growth27.97%26.59%
    5Granahan Inv Mgt - Sm Cap Focused GrthU.S. SA small growth27.14%26.24%
    6ARK Disruptive InnovationU.S. SA midcap growth27.13%26.88%
    7Baillie Gifford US Equity GrowthU.S. SA large growth26.30%25.67%
    8J.P. Morgan US Technology Leaders - MAU.S. SA technology25.22%24.75%
    9Morgan Stanley GrowthU.S. SA large growth24.87%23.97%
    10APS Equity Strategy CompositeU.S. SA midcap growth24.58%23.32%
    Overall U.S. equity CITs: one year
    RankFundCategoryGross returnNet return
    1State St Nasdaq-100 Indx NL Cl AU.S. SA large growth 33.90%
    2State St Nasdaq-100 Indx NL Cl MU.S. SA large growth 33.88%
    3BNYM Mellon US Small/Mid Cap Growth Eq 2U.S. SA midcap growth 33.35%
    4T. Rowe Price New Horizons Tr-ZU.S. SA midcap growth 27.79%
    5Wellington CIF II Growth S2U.S. SA large growth 27.58%
    6T. Rowe Price New Horizons Tr-AU.S. SA midcap growth 27.01%
    7T. Rowe Price New Horizons Tr-DU.S. SA midcap growth 26.93%
    8AB US Large Cap Growth CT BU.S. SA large growth 24.86%
    9AB US Large Cap Growth CT P-3U.S. SA large growth 24.48%
    10AB US Large Cap Growth CT P-1U.S. SA large growth 24.45%
    Overall U.S. equity CITs: five years
    RankFundCategoryGross returnNet return
    1T. Rowe Price New Horizons Tr-ZU.S. SA midcap growth 19.71%
    2State St Nasdaq-100 Indx NL Cl AU.S. SA large growth 19.58%
    3State St Nasdaq-100 Indx NL Cl MU.S. SA large growth 19.54%
    4T. Rowe Price New Horizons Tr-DU.S. SA midcap growth 18.92%
    5T. Rowe Price New Horizons Tr-AU.S. SA midcap growth 18.92%
    6Wellington CIF II Growth S2U.S. SA large growth 18.66%
    7AB US Large Cap Growth CT BU.S. SA large growth 17.34%
    8MFS Growth Equity CIT Class 1U.S. SA large growth 17.18%
    9MFS Growth Equity CIT Class 4U.S. SA large growth 17.00%
    10BNYM Mellon US Small/Mid Cap Growth Eq 2U.S. SA midcap growth 16.71%
    Morningstar Inc.

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

    Ranked first was the ARK Next Generation Internet strategy, which returned a gross 64.06%, and ranked third was the ARK Genomic Revolution strategy, which returned a gross 56.85%.

    The Next Generation Internet strategy is also the top performer for the five years ended June 30, with an annualized gross return of 35.23%.

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

    Ms. Wood said in a phone interview that the Next Generation Internet strategy is all about artificial intelligence and how AI is entering every area of our lives.

    "Any company or any manager that does not harness its data to make better decisions and faster decisions and higher-quality decisions is going to lose out competitively," Ms. Wood said.

    Among the strongest performers in that strategy, Ms. Wood said, is Tesla Inc.

    "Many people say 'What does (Tesla) have to do with artificial intelligence?' Autonomous technology is all about artificial intelligence, and the other element of the Next Generation Internet is over-the-air software updates," Ms. Wood said. "I've had my Tesla since September 2018. I have never had to take it into the shop except for a nail in the tire. The AI that Tesla is able to anticipate problems with my car before I know they're there. They're the only auto company today that uses over-the-air software updates to improve performance. That's been a marquee stock for us, of course."

    She also cited Square Inc., "which we think is going to be very disruptive for the financial services sector, not only banking, but insurance and any other financial service you can think of."

    Ms. Wood said the Genomic Revolution strategy, which features holdings of DNA sequencing-related companies, has been a beneficiary of the impact of the COVID-19 pandemic.

    "We are in a completely new realm when it comes to health care," Ms. Wood. "I think the coronavirus rang the bell for it."

    Among the holdings that contributed to outperformance is Illumina Inc., the most prominent DNA sequencing company, Ms. Wood said.

    Other contributors to outperformance were CRISPR Therapeutics AG and Invitae Corp.

    Ranked second for the year was the Morgan Stanley Discovery strategy, which returned a gross 58.55%.

    According to its Morningstar profile, the midcap growth strategy managed by Morgan Stanley Investment Management, New York, seeks "high-quality companies with sustainable competitive advantages and focuses on long-term growth potential rather than short-term events."

    The top three holdings in the strategy as of March 31 were Shopify Inc., Slack Technologies Inc. and Zoom Video Communications Inc.

    Dennis Lynch, head of counterpoint global at Morgan Stanley Investment Management, was not available to provide further information.

    Ranking fourth for the year ended June 30 was Zevenbergen Capital Investments LLC's growth equity strategy with a gross return of 56.4%.

    Joseph Dennison, portfolio manager for the Seattle-based firm, said in a telephone interview the overall firm's focus is high-conviction, high-growth, all-cap strategies in large, rapidly growing markets.

    Among domestic equity strategies for the year ended March 31, the strategy was ranked fifth with a gross return of 11.48%, and Mr. Dennison said the strategy's success going into the second quarter of this year was a "continuation and acceleration of a lot of the digital transformation trends we saw at the end of March."

    Mr. Dennison said overall sectors that have continued to see continued strength include digital payment platforms, e-commerce and virtual health care, many of which have been beneficiaries of work-at-home mandates as a result of the COVID-19 pandemic, he said.

    Shopify, an e-commerce provider, and Teledoc Health Inc., the telemedicine and virtual health company, continue to be strong contributors to the success of the strategy, he said.

    The Trade Desk Inc. also contributed to strong performance, he said.

    "It's an advertising technology platform company really benefiting from the shift of ad budgets to online from offline," Mr. Dennison said.

    He specified that The Trade Desk in particular benefited during the second quarter.

    "Certainly there were sharp advertising declines late in the first quarter, but as customers returned to the markets, they looked to spend as efficiently as possible," Mr. Dennison said.

    Zevenberger also had another strategy in the top 10. Its Genea growth strategy ranked 10th for the year ended June 30 with a gross return of 48.1%.

    "Genea strategy is slightly more concentrated in earlier stage and faster-growth companies with an emphasis on technological advantages," Mr. Dennison said. The Genea strategy was also second for the five years ended June 30 with an annualized gross return of 28.35%.

    Ranked fifth was Taylor Frigon Capital Management LLC, San Luis Obispo, Calif., with its Israeli innovation strategy, which returned a gross 55.54% for the year ended June 30.

    CIO Gerry Frigon said in a telephone interview the firm has an overall narrative-based investing philosophy in which it divides the world into three basic categories: demographic, business processes and technology.

    "From those three broad categories we build various narratives that we think are going to drive growth over the next few years, say, the next five to 10 years," Mr. Frigon said, "and then overlay that on our bottom-up work on which companies are shining through."

    Overall, the manager embraces the idea of "owning the business, not the stock," Mr. Frigon said.

    The manager's core growth strategy has about 47 companies, and the Israeli innovation strategy is a subset of Israeli-owned businesses out of that group.

    "It is meant to be a high-concentration, high-conviction portfolio," Mr. Frigon said. While the strategy doesn't specifically have a focus on core technology companies, "we find Israel is so advanced technologically that those areas are where they really shine."

    Among the holdings that have contributed to the strategy's outperformance are Fiverr International Ltd.

    The rest of the top 10 strategies for the year ended June 30 were: Baillie Gifford & Co.'s U.S. equity growth strategy, which returned a gross 50.71%; Evolutionary Tree Capital Management's leading innovators focused growth strategy, 50.5%; Morgan Stanley Investment Management's Insight strategy, 50.26%; Leading Edge Investment Advisors LLC's CBI strategy, 48.32%; and Zevenbergen's Genea growth strategy, 48.1%.

    For the five years ended June 30, seven of the top 10 strategies were growth strategies and the other three fell within Morningstar's technology category.

    Ranked third behind ARK's Next Generation strategy and Zevenbergen's Genea growth strategy was MSIM's Insight strategy, with an annualized gross return of 28.16%.

    Azzad Asset Management Inc.'s small-cap growth strategy was ranked fourth with an annualized gross return of 27.97%, and Granahan Investment Management Inc.'s small cap focused growth strategy was ranked fifth with an annualized gross return of 27.14%.

    The median five-year annualized return for domestic growth strategies in Morningstar's domestic equity separate account universe was 11.5%, and the median among all domestic equity strategies was 7.05%. The Russell 3000 Growth index returned an annualized 17% for the five years ended June 30, and the Russell 3000 index returned an annualized 11.7%.

    Within the collective investment trust universe, each of the top 10 domestic equity CITs for the one year and five years ended June 30 were growth strategies.

    The State Street Global Advisors Nasdaq 100 index Class A CIT led all trusts for the second quarter in a row with a net return of 33.9% for the year ended June 30, while ranked second was the SSGA Nasdaq 100 index Class M CIT, with a net return of 33.88%.

    The rest of the top five CITs for the year ended June 30 were: the BNY Mellon U.S. small/midcap growth equity CIT, which returned a net 33.35%; T. Rowe Price Group Inc.'s New Horizons Class Z CIT, which returned a net 27.79%; and Wellington Management Co. LLP's CIF II growth trust, which returned a net 27.58%.

    The median return of domestic equity collective investment trusts in Morningstar's universe for the year ended June 30 was 0.81%.

    For the five years ended June 30, T. Rowe Price's New Horizons Class Z CIT led all trusts with an annualized net return of 19.71%, followed by SSGA's Nasdaq 100 Index Class A CIT with an annualized net 19.58%.

    The rest of the top five CITs for the five years ended June 30 were: SSGA's Nasdaq 100 Index Class M CIT, with an annualized net 19.54%; T. Rowe Price's New Horizons Class D CIT, 18.92%; and T. Rowe Price's New Horizons Class A CIT, also 18.92%.

    For the five years ended June 30, the median annualized return for domestic equity CITs was 6.68%.

    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 Aug. 5.

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