A generous portion of commodities and no exposure to financial services company stocks was the recipe for success among equity managers for the 12-month period ended June 30, according to Morningstar Inc.'s separate-account/commingled-fund database.
All but one of the top 10 portfolios in overall domestic equity in Chicago-based Morningstar's separate-accounts universe for the year was a commodity or energy separate account.
The exception was the Husic Classic Hedge, a domestic-mid-cap-growth separate account that uses hedging techniques and is run by Husic Capital Management of San Francisco.
Boston-based OFI Institutional Asset Management Inc.'s OFII Commodities Strategy I was the top-performing manager in the composite U.S. stock segment with 77.2%. However, the majority of the portfolio was invested in bonds.
New York-based
Goldman Sachs Asset Management's Commodities Enhanced Futures index strategy was in the second spot with 76.2% in a portfolio made up of stock and bond futures contracts.
BlackRock Inc. of New York made the top 10 with two portfolios:
BlackRock Small-Cap Energy, which was third with 72.1%, and
BlackRock All Cap Energy, in fourth place with 54.5%.
MEDIAN PERFORMANCE
By comparison, the median manager in the overall equity category returned -11.3%. The Russell 3000 Index returned -12.7% for the same period.
(For an extensive list of rankings, see related charts.)
The domination of specialty-natural-resources accounts in the domestic-composite listings is a relatively new phenomenon, noted Rachael Olson, team leader for Morningstar's separate-accounts/ commingled-fund database.
Natural resources were absent in the rankings and didn't start becoming significant until the end of last year, she said. They dominated the listings for the one-year period ended March 31, with seven of the top 10 overall managers in the category, versus two of the top 10 as of the end of last year.
Investors piled into the sector during the six-month period ended June 30 because commodities were performing well, compared with other parts of the stock market, said Steve Deutsch, director of separate accounts and collective trusts at Morningstar.
Until July, when there was a pullback, investor interest in the sector had been "rewarded by nice return numbers," he said.
Goldman Sachs' returns for the 12-month period ended June 30 were driven by the energy sector, which was up about 37% in the second quarter of 2008, according to Stephen Lucas, head of commodities management for Goldman Sachs Asset Management.
It was a different story in the first quarter, when returns were boosted by industrial metals, energy and precious-metals sectors, he wrote in an e-mail response to questions. Investing in futures is easier to manage, Mr. Lucas wrote.
The enhanced index products invest in either the Standard & Poor's 500 stock index, the Goldman Sachs Commodities Index or an alternate index of the investor's choice, he wrote.
"The GSCI is a production-weighted basket of global commodities. Because the physical commodities themselves are difficult to manage, the index is implemented using futures contracts," Mr. Lucas wrote.
Futures also are more direct than investment in equities in the commodities sector, he wrote.
"With commodity futures, there is no exposure to corporate management, changes in tax or royalty rates, or resource expropriation by sovereign governments," Mr. Lucas wrote.
BlackRock's two separate accounts benefited from the increase in commodities prices, including the energy sector, said managing director Dan Rice, who co-manages both separate accounts with Denis Walsh, also a managing director.
"Crude oil was the poster child after hitting $147 a barrel" at the end of June, Mr. Rice said.
COAL FUELS A RALLY
The small-cap portfolio would have benefited the most because the all-cap portfolio is more sensitive to the changes in the underlying commodities prices, he said.
"It all comes down to a couple of subsectors. Coal was the best energy subsector in the past year," Mr. Rice said.
The separate accounts have 20% to 30% invested in coal, much higher than the typical index's 5% allocation, he said.
BlackRock's separate accounts also have a heavier weighting in exploration and production companies. The small-cap portfolio outperformed during the year due to its investment in coal, and exploration and production, companies.
However, the sudden success of commodities has attracted so many dollars to the sector that observers wonder if a bubble is forming, Mr. Deutsch said.
"There is some amount of irrational exuberance," he said. "The concern is that speculation has occurred or will [occur], especially in the areas of commodities of energy and oil."
During the past few weeks, investors have been pulling back for fear of a bubble and because of slightly falling oil prices, said David Kathman, a mutual fund analyst at Morningstar.
There has been a sharp correction in the past five weeks, Mr. Rice said.
Each year, there are usually three significant corrections of 10% to 15%, but the sector generally bounces back enough to compensate for it. This recent 20% correction happens only every year or year and a half and is "bone-rattling," Mr. Rice said.
"But I don't think it is a negative sea change" in the value of the stocks, he said.
Just as commodities are dominating the current listings, real estate — mostly real estate investment
trust portfolios — is missing from the one-year and five-year top 10 lists. For the five-year period ended March 31, two real estate portfolios were in the top-10 domestic separate accounts, based on five-year returns.
"There was a sea change or mostly a tidal wave," Mr. Deutsch said. "All areas of real estate were affected by the contagion of concern about valuations and the inability to find the bottom."
REALTY EXPOSURE
But real estate still was making an impact through the holdings of some of the natural-resources portfolios. For example, as of March 31, both the Goldman Sachs Commodities Enhanced Index and Pimco Commodities Plus portfolios held
Fannie Mae and
Freddie Mac pass-throughs or pools of debt, as well as forward-rate notes, which are notes with variable interest used to protect against interest rate increases.
Financial services is another area that is absent from the top 10 lists.
"I believe a lot of money managers have regretted exposure to financial services in the recent months," Mr. Deutsch said.
As banks take more write-downs, the sector is expected to take even more of a beating. A portfolio heavy in financial services is a recipe for disaster, Mr. Kathman said.
Frank J. Husic, managing partner of Husic Capital, said the Husic Classic Edge portfolio did well by taking a large number of short positions in a number of financial companies.
The portfolio also did well shorting stocks in several other sectors, including casinos, restaurants, retail and semiconductors.
"I'm looking forward to the day of 80% long [in the portfolio]," Mr. Husic said. But the poor market, high energy costs, the credit crunch and risk of unemployment created head winds that were too big for the stock market to face, he said.
Another hot sector in the 12-month period ended June 30 was Latin America, mainly the result of stock market increases in Brazil.
This turned the emerging markets into a "good news, bad news" scenario. Separate accounts with more exposure to Latin America beat portfolios more heavily weighted in China and India, Mr. Deutsch said.
Arleen Jacobius is a reporter at sister publication Pensions & Investments.
