Gold retained its luster, pipelines flowed and real estate provided a strong foundation for leading equity managers during the 12-month period ended Sept. 30, according to the Morningstar database.
The top 10 managers in the composite U.S. stock group produced gross returns at least triple the Russell 3000 Index's 10.96% return for the same time period and also triple the separate-account median of 11.99%.
The leader for both the 12-month and five-year periods ended Sept. 30 was Tocqueville Asset Management LP's Gold Equity strategy, with a gross one-year return of 58.5% and an annualized 24.96% for five years. Tocqueville also led the 12-month and five-year categories for the periods ended June 30.
“It comes down to our smaller-cap stocks' having performed very well,” said John Hathaway, a senior portfolio manager and senior managing director at Tocqueville. “Small caps are popular because they have takeover potential. We don't always seek that out, but it has worked out that way.”
One example is Andean Resources Ltd., which trades on the Toronto Stock Exchange and the Australian Stock Exchange. In early September, Goldcorp Inc. offered a combination of cash and stock to acquire Andean that represented a 35% premium over Andean's Toronto Stock Exchange closing price on the day before the offer. Tocqueville also owns shares in Goldcorp.
Mr. Hathaway said he would be “very happy to be a larger shareholder in Goldcorp” when the deal closes.
Tocqueville's Gold Equity portfolio typically consists of 50 to 60 stocks, and the annual turnover rate is less than 10% per year, he said. Although most of Mr. Hathaway's clients are wealthy families and individuals, he said he detected an increase in interest by institutions this year. “Gold is underrepresented in typical institutional portfolios,” he said.
MLP PREDOMINANCE
Strategies that emphasize master limited partnerships play a disproportionate role among top performers, compared with Morningstar's domestic equity composite database, said Adam Baranowski, a data analyst for separately managed accounts and collective trusts at Morningstar.
Among the 3,044 strategies in the domestic equity composite, only six have an MLP focus — but five of them are in the top 10 for the 12-month period ended Sept. 30 and three are in the top 10 for the five-year period. “MLPs thrive in an environment where interest rates are stable or declining and cash distributions are rising,” Mr. Baranowski said.
In Morningstar's 12-month gross- returns list, the second- through fifth-best strategies, as well as the ninth-ranked strategy, were all MLPs that hold investments in the oil and gas industry — pipelines, storage facilities and processing plants — that lack the volatility of oil exploration investments.
“Stable businesses make good MLPs,” said Malcom Day, a partner in Eagle Global Advisors LLC. Eagle flew into second place in the 12-month category, with a 51.03% gross return for its MLP composite strategy. The portfolio usually holds 23 to 25 stocks with an annual turnover rate of 25% to 30%. Mr. Day declined to discuss specific holdings.
He said MLPs are “not very invested” in the Gulf of Mexico, so they didn't experience repercussions from the BP PLC oil well explosion and ensuing leak. Offshore drilling “is more volatile,” he said. “There's hurricane risk.”
The next three MLP strategies are stacked closely together in the 12-month category: Miller/Howard Investments Inc.'s MLP strategy with a 46.71% gross return, Fiduciary Asset Management LLC's master limited partnerships at 46.66%, and Beacon Street Capital LLC's high-income master limited partnerships at 46.49%. In ninth place, with a 12-month gross return of 36.83%, was TimeCapital Investor Advisory Services Inc.'s equity yield focus strategy.
Beacon Street produced strong returns “just by holding on to what we own,” said Herron Weems, managing director and co-founder of the firm, which launched its MLP investing strategy in early 2009. With a portfolio that usually has 13 to 14 investments, Mr. Weems said turnover is “almost zero, and we don't expect high turnover.”
Mr. Weems said his firm owns shares in three sectors. Examples include Linn Energy LLC and Pioneer Southwest Energy Partners LP, which own oil- and gas-producing properties; MarkWest Energy Partners LP, which gathers, transports and processes natural gas; and Kinder Morgan Energy Partners LP, which owns pipelines and storage facilities.
In Morningstar's five-year gross returns category, Eagle Global landed in sixth place with a gross return of 15.26%, Fiduciary Asset Management placed eighth with 13.01% and TimeCapital came in ninth with 12.92%. All returns are annualized.
For the five-year period ended Sept. 30, the annualized return for the Russell 3000 benchmark was 0.92%, and the median annualized gross return was 2.14%.
REITS IN TOP 10
Real estate investment trust strategies featured in the top 10 for the 12-month period ended Sept. 30 were eighth-place Cohen & Steers Inc. at 37.43% and 10th-place Neuberger Berman Group LLC at 36.1%.
Neuberger Berman likes to invest in a wide range of REITs — warehouses, offices, apartments, retail, health care, storage facilities — and then adjusts the weighting of its holdings to reflect the market and industry trends, said Brian Jones, a senior vice president and portfolio manager.
Because his firm expects “muted job growth for the next few years,” Mr. Jones said his firm is underweighting its holdings in several areas that will be weak in a weak economy — offices, rental apartments and open-air shopping centers.
With a portfolio of 30 to 40 investments, he said annual portfolio turnover in the trailing 12 months was 70%.
“That's higher than it has been historically,” he said. “REIT space has been relatively volatile in recent years. We have to be nimble.”
HEALTH CARE, HOTELS
Mr. Jones said his REIT portfolio is overweighted in health care and hotels.
“Health care is the least cyclical commercial property, and we believe medical offices will benefit from health-care expansion [due to the new federal health care law],” he said. “If more people have insurance, there will be more visits to doctors' office in medical office buildings.”
One favored investment is Ventas Inc., which owns medical offices, senior housing facilities, nursing homes and hospitals.
Hotel REITs are attractive because “we're beginning to see early indications of renewed business travel,” Mr. Jones said.
He cited Host Hotels & Resorts Inc., which owns upscale properties in the U.S. and worldwide.
Among the top-10-performing U.S. stock collective investment trusts for the 12-month period ended Sept. 30, five were REITs, including the leader, Wilmington Trust Fiduciary Services Co.'s Total Return REIT portfolio which had a gross return of 33.45%, or triple the Russell 3000 benchmark of 10.96% and almost triple the 11.77% median in this group.
The Wilmington Trust REIT strategy was followed by Delaware Investments' Smid Cap Growth Fund, with a gross return of 32.15%; the SSgA/Tuckerman U.S. REIT Index Fund from the Tuckerman Group LLC and State Street Global Advisors, 30.01%; the SSgA/Tuckerman Active REIT Fund, 29.89; and Invesco Equity Real Estate Securities Trust, 28.15%.
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Over the five-year period ended Sept. 30, the leader was Westwood Management Corp.'s SmidCap fund with an annualized gross return of 9.03%. The annualized Russell 3000 benchmark return for the same period was 0.92% and the median gross return was an annualized 1.49%.
Robert Steyer is a reporter at sister publication Pensions & Investments.
