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  2. Special Report: Top-Performing Managers
May 20, 2022 10:15 AM

Energy, natural resources strategies take over amid broad market drops

Rob Kozlowski
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    Michael Roomberg

    Natural resources and energy sectors made a big comeback and dominated the top 10 list of domestic equity strategies for the year ended March 31, according to the latest data from Morningstar Inc.'s separate account/collective investment trust database.

    Of those top 10 strategies, six were categorized as natural resources strategies and two as energy strategies. Rounding out the top 10 were a small-cap blend strategy and midcap value strategy.

    The overall median return for domestic equities within the Morningstar separate account universe was 8.58% for the year ended March 31, compared with the Russell 3000 index return of 11.9%.

    Stephen Welch, Chicago-based analyst with Morningstar, said energy has been the best-performing sector in the past year, particularly in the first quarter of 2022. The S&P 1500 Energy index returned 39.1% for the quarter ended March 31 and 64.2% for the year, while the S&P Global Natural Resources index returned 16.8% for the quarter and 30.8% for the year. For the quarter ended March 31, the overall median return for domestic equities in the Morningstar universe was -5.29%, compared with the Russell 3000 index's return of -5.28%.

    In a rough quarter, Mr. Welch said large-cap equity was really the best place to be.

    "Surprisingly, large-cap growth actually outperformed large-cap value, but then when you go down the market caps, value outperformed growth," he said.

    The overall three-month and one-year median returns for domestic value equities within the Morningstar separate account universe were -0.78% and 12.42%, respectively, well above the respective median returns for domestic growth equities of -10.86% and 2.74% for the period.

    The top-performing equity managers for Q1 2022
    Overall U.S. equity separate accounts: one year
    RankFundCategoryGross returnNet
    return
    1Miller/Howard N. Amer. Energy (w/o K-1s)U.S. SA equity energy69.29%68.08%
    2Miller/Howard N. Am. Energy w/o K-1s SMAU.S. SA equity energy68.30%63.52%
    3Miller/Howard N. Amer. Energy (w/ K-1s)U.S. SA equity energy67.47%66.27%
    4Miller/Howard N. Amer. Energy w/ K-1 SMAU.S. SA equity energy67.25%62.50%
    5Newton Global Natural ResourcesU.S. SA natural resources62.49%61.39%
    6Macquarie Global Natural ResourcesU.S. SA natural resources51.29%50.11%
    7Jennison Global Natural Resources EquityU.S. SA natural resources45.76%44.67%
    8Ninety One Global Natural ResourcesU.S. SA natural resources43.73%42.77%
    9Orleans Energy OpportunitiesU.S. SA equity energy39.38%38.03%
    10Cohen & Steers Gl Natural Resource CompU.S. SA natural resources37.89%37.04%
    Overall U.S. equity separate accounts: five years
    RankFundCategoryGross returnNet
    return
    1Next Century Growth Micro Cap GrowthU.S. SA small growth38.43%37.50%
    2Mark FocusU.S. SA large growth31.45%29.59%
    3Zevenbergen Genea GrowthU.S. SA technology31.00%30.00%
    4Mark Long OnlyU.S. SA large growth30.49%28.55%
    5ARK Next Generation InternetU.S. SA technology30.42%29.45%
    6Granahan Small Cap SelectU.S. SA small growth29.93%28.70%
    7Granahan Small Cap Focused GrowthU.S. SA small growth29.03%27.95%
    8J.P. Morgan US Technology Leaders - MAU.S. SA technology28.50%27.97%
    9Baron High Growth StrategyU.S. SA large growth28.33%27.09%
    10Advisory Research U.S. Small Cap GrowthU.S. SA small growth27.63%26.43%
    Overall U.S. equity CITs: one year
    RankFundCategoryGross returnNet
    return
    1Wellington CIF Research EnergyU.S. SA equity energy41.45%
    2State St S&P Gbl LgMdCp NR Idx NL Cl AU.S. SA natural resources35.91%
    3Duff & Phelps U.S. REIT CIT, Class 1U.S. SA real estate31.14%30.29%
    4Wellington CIF Real Estate SecuritiesU.S. SA real estate29.80%
    5State St REIT Indx NL Cl AU.S. SA real estate27.67%27.66%
    6BNYM Mellon SL REIT Index FundU.S. SA real estate27.57%27.47%
    7BNYM Mellon NSL REIT Index FundU.S. SA real estate27.40%27.28%
    8PIMCO RealEstatePLUS CIT IU.S. SA real estate27.87%27.28%
    9AEW Real Estate Securities Divers TrustU.S. SA real estate26.20%25.44%
    10American Century U.S. Real Estate Sec TrU.S. SA real estate25.84%24.97%
    Overall U.S. equity CITs: five years
    RankFundCategoryGross returnNet
    return
    1State St Nasdaq-100 Indx NL Cl AU.S. SA large growth23.43%
    2Wellington CIF II GrowthU.S. SA large growth22.02%22.02%
    3Ivy Large Cap Growth CIT Class 1U.S. SA large growth21.22%
    4BlackRock Russell 1000® Growth FU.S. SA large growth20.92%
    5NT R1000 Growth Index Fund - LU.S. SA large growth20.86%
    6State St Russell Lg Cap Gr Indx NL Cl AU.S. SA large growth20.85%
    7NT R1000 Growth Index Fund - NLU.S. SA large growth20.83%
    8BlackRock Russell 1000 Growth NL FU.S. SA large growth20.82%
    9NT R1000 Growth Idx Fd - DC - NL - 2U.S. SA large growth20.79%
    10AB US Large Cap Growth CT P-1U.S. SA large growth20.62%

    Regarding natural resources, Mr. Welch said strategies that have greater weights in mining and metals generally outperformed others.

    Miller/Howard Investments Inc., Woodstock, N.Y., led the list of top domestic equity managers with its North American energy strategy returning a gross 69.29% for the year ended March 31.

    Michael Roomberg, portfolio manager, said in a phone interview the strategy was launched in 2011 when the company saw how technological advancements in shale were "changing the fortunes of energy pipelines."

    "The aim is to capture emerging opportunities along the full energy value chain," Mr. Roomberg said. The strategy has consistently outperformed its benchmark, and he said active management is key to the strategy's success.

    "Passive investments in energy are essentially cap-weighted proxy bets on the price of crude oil, and we view the industry as more dynamic than that and broader than that," Mr. Roomberg said.

    One holding Mr. Roomberg cited as a particular driver of outperformance was Targa Resources Corp., which he said they bought in the fall of 2020. The company specializes in natural gas liquids, which he said "for the majors, it's just not a huge material part of their business, but for Targa it's nearly everything they do."

    "It was built on a mountain of absurdly expensive financing," Mr. Roomberg said, "so the company finally got to a point in 2020 that it generated enough cash to fix the balance sheet and it's now in a much better position. ... It's a company that sort of represents this exposure that you don't normally find in a passive way."


    Natural resources produce big gains

    Ranked second was Newton Investment Management North America LLC's global natural resources strategy, which returned a gross 62.49% for the year ended March 31.

    Albert Chu, Boston-based portfolio manager, said in an interview that his team is "singularly focused on generating alpha."

    While the strategy's benchmark is the S&P Global Natural Resources index, Mr. Chu said, "we scour everything. It's global in nature and (we can buy) pretty much any commodity. We take quite frankly a lot of enjoyment in finding these things that beat the benchmark."

    The strategy focuses on finding underrepresented, undervalued commodities, and Mr. Chu said the team members think of themselves as specialists in identifying cycles before they occur.

    He also said that his background in hedge funds provides a long/short perspective.

    While he would not identify specific holdings, Mr. Chu said one of the things that contributed to outperformance was identifying natural gas as a place to take positions over the past two years, which has really paid off, as has selling positions in iron ore, where inventory was still building while the growth driver there has been the Chinese property market, which is controlled by only three or four companies.

    Macquarie Asset Management, Philadelphia, was ranked third with its global natural resources strategy returning a gross 51.29% for the year ended March 31.

    Samuel Halpert, chief investment officer, global natural resources equity, and Geoffrey King, portfolio manager, global natural resources equity, said in a joint phone interview the strategy is both sector- and benchmark-agnostic that averages between 28 and 35 holdings.

    "We're not benchmarkers in any way, shape or form," Mr. Halpert said. "We're looking for the best individual ideas."

    Both Messrs. Halpert and King said the strategy has benefited from what they term as a "misallocation of capital" due to the prevailing opinion that energy is transitioning away from oil and gas, as well as the downturn in energy prices that came out of the COVID-19 pandemic.

    The strategy benefited primarily from "companies that were coming out of bankruptcy during that period and were coming out with clean balance sheets that were ignored," Mr. King said.

    "This space is tricky because it's very difficult to go against a cycle," Mr. Halpert said, "Like even the best companies, if the commodity is going against them from stock performance in the short term, can struggle and underperform. So you definitely want to try to get the cycle right, but there are definitely some better businesses (out there)." Neither would name specific holdings.

    Ranked fourth was New York-based Jennison Associates LLC's global natural resources equity strategy, which posted a gross return of 45.76% for the year ended March 31.

    In a joint interview, Neil P. Brown and Jay Saunders, both managing directors and portfolio managers, said the strategy is very much a bottom-up fundamental strategy.

    "We want to own companies through the cycle that are going to be around that can take advantage of the up cycle but also won't go bankrupt during the downturn," Mr. Brown said.

    While Messrs. Brown and Saunders would not name specific holdings, Mr. Saunders said the types of moves that have benefited the strategy since the end of 2020 were seeking opportunities in companies that were on the edge of international exploration such as in South America.

    Taking the fifth spot was Ninety One North America Inc.'s global natural resources strategy, which returned a gross 43.73% for the year ended March 31.

    Tom Nelson, London-based co-head of thematic equity within the multiasset team and portfolio manager of energy and natural resources strategies, said in an interview that he believes the world's point of view on natural resources is changing.

    "Resources companies have a role to play in a decarbonized future, whether that's mining companies providing nickel, copper and zinc, or whether that's energy companies moving away from oil and gas," Mr. Nelson said.

    In general, the strategy has target allocations of about 40% each in energy and mining and 20% in agriculture, although Mr. Nelson said they can deviate very significantly from that allocation. In the last third of 2021, in fact, he said the allocation to energy had been about 21% and they have since doubled it.

    Among the specific holdings that have benefited the strategy are Glencore PLC, a mining company, and Nutrien Ltd., a Norwegian oil and gas company, he said. He also noted that in general, gold and agriculture were big drivers because they're "less sensitive to the economic cycle."

    Growth still on top over 5 years

    For the five years ended March 31, seven of the top 10 strategies were growth-oriented, with the other three in the technology category. Four of the growth strategies fell within Morningstar's small-cap category and three were categorized as large-cap strategies.

    The overall median annualized return for domestic equities within the Morningstar separate account universe was 12.94% for the five years ended March 31, compared with the Russell 3000 index annualized return of 15.4% for the period.

    The median annualized return in Morningstar's universe for overall growth strategies was 17.16%, while the annualized median return for the period for overall value strategies was 10.98%. The Russell 3000 Growth index and Russell 3000 Value index returned an annualized 20.1% and 10.1%, respectively, for the period.

    The top performer for the five years ended March 31 was Minneapolis-based Next Century Growth Investors LLC, with its microcap growth strategy posting an annualized gross return of 38.43%.

    Within the collective investment trust universe for the year ended March 31, eight of the top 10 domestic equity CITs were real estate securities strategies.

    The two top CITs, however, fell within Morningstar's equity energy and natural resources categories, respectively.

    Leading all trusts was Boston-based Wellington Management Co. LLP's CIF research energy trust, which reported a net return of 41.45%, and that was followed by Boston-based State Street Global Advisors' S&P global large-midcap natural resources index trust, which returned a net 35.91% for the year ended March 31.

    The median return of domestic equity collective investment trusts in Morningstar's universe for the year ended March 31 was 8.96%.

    For the five years ended March 31, all of the top 10 collective investment trusts were large-cap growth trusts.

    The top-ranked CIT for that period was the SSGA's Nasdaq 100 Index Class A CIT, which had an annualized net return of 23.43%.

    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 separate account rankings on which this story is based were pulled May 6, and the CIT data were pulled May 4.

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