Small-cap strategies reclaimed the top spots in the overall equity rankings for the 12-month period through Sept. 30, according to Morningstar Inc.'s separate-account/ collective-investment-trust database.
“Small-cap players are definitely shining again,” said Andy Kwon, a Morningstar data analyst.
“I think part of that might be because people are becoming more confident,” he said. “People were pessimistic, and now they see things are steadily growing and are willing to take a little more risk.”
Eight of the 10 top-performing managers over the period were using small-cap strategies, which haven't dominated the scene since the third quarter last year, according to Mr. Kwon.
The other portfolios in the top 10 were midcap and large-cap strategies.
Equity strategies overall im-proved in the third quarter. The median return for all stock portfolios was 5.8% during the quarter, compared with -4.39% in the second quarter.
The figure slightly trailed the 6.23% return of the Russell 3000 Index for the period. For the 12-month period through Sept. 30, the median return for all stock portfolios was 28.3%, compared with 0.18% for the 12-month period ended June 30.
Meanwhile, the Russell 3000 returned 30.2% for the 12-month period through Sept. 30.
FLOATING ALL BOATS
Mr. Kwon also pointed out that every equity investment style exhibited positive median returns in the third quarter.
“What it shows is that all the classes have been performing well, so it's safe to say things are improving,” he said. “July was a rough month, but in August and September, there was a turnaround.”
The top performer for the year once again was Granahan Investment Management Inc.'s Small-Cap Focused Growth portfolio, with a gross return of 54.2% for the 12-month period through Sept. 30, up 35 percentage points from the quarter ended June 30.
“We are looking for what we consider "desert island' companies,” said Andrew Beja, managing director and portfolio manager for Granahan. “These are companies we would take if stranded on an island; they have large opportunities for growth, very strong competitive positions and strong management cultures.”
Some of the companies in which the firm invests are Demandware Inc. (DWRE), which provides e-commerce software for online retailers, and SPS Commerce Inc. (SPSC), which provides next-generation electronic data interchange for large retailers.
The small-cap portfolio is one of just two crossovers from the June 30 reporting period, when large-cap strategies dominated the top 10. The other was Kopp Investment Advisors LLC's small-cap-growth portfolio, which was seventh in the rankings, with a gross return of 48.22%.
“Small-caps, in general, can provide very good opportunities for growth, given these companies are in some of the most exciting areas of the economy, and naturally, it's easier to grow off a small base than it is a very large one,” Mr. Beja said. “However, it can be a treacherous asset class, which is why one has to really pay attention to the risk/reward.”
The second-best-performing manager in the overall equity separate-account universe for the year was Hotchkis & Wiley Capital Management LLC, with its midcap-value portfolio returning a gross 50.65%.
“We are a value manager, so we keep our investment philosophy through thick and thin,” said Stan Majcher, a Hotchkis portfolio manager. “It doesn't do well every year, but it does well over long periods of time.”REGIONAL BANKS
The portfolio, which was the only midcap strategy in the top 10, aims to buy companies that are valued low and attractively priced but still have good balance sheets.
“Regionally, U.S. banks don't have the exposure to what's pushed them down in the headlines,” Mr. Majcher said. “If you look at assets and capital, they are profitable today and they are actually putting more capital into the books. They have low risk and high returns, so we have been buying those stocks.”
Mr. Majcher declined to provide specific names.
In third place was the small-cap-value strategy of Cooke & Bieler LP, with a gross return of 50.17%.
The value equity boutique firm also looks for strong balance sheets as criteria for investments.
“Our stocks have three characteristics,” said Daren Heitman, partner and portfolio manager at Cooke & Bieler.
“First is a ... business franchise that will endure the ups and downs of the economy. Second, we require the businesses we own to have strong balance sheets. And third, we create a discounted-cash-flow model,” Mr. Heitman said.
Mr. Heitman declined to provide specific names.
Melanie Zanona is a reporter with sister publication Pensions & Investments.
