Energy and natural resources sectors dominated the top 10 list of domestic equity strategies for the year ended June 30, according to the latest data from Morningstar Inc.'s separate account/collective investment trust database.
Of the top 10 strategies, five were categorized as natural resources strategies and two were categorized as equity energy, while the three remaining strategies were categorized as large-cap value strategies.
Their performance marks the second quarter in a row that the one-year top 10 list was topped by energy and natural resources strategies, by far the two best-performing sectors in quarters characterized overall by a struggling and volatile equity return environment.
For the year ended March 31, six of the top 10 performing domestic equity strategies were categorized as natural resources strategies and two as energy strategies.
The overall median return for domestic equities within the Morningstar separate account universe was -12.1% for the year ended June 30, compared with the Russell 3000 index return of -13.9%.
Stephen Welch, Chicago-based analyst with Morningstar, said that while energy tapered off in the second quarter as oil prices moderated, its trailing one-year returns were more than strong enough for the sector to top the list.
The S&P 1500 Energy index returned -5.9% for the three months ended June 30, but for the one year ended June 30 it returned 38.1%. The S&P Global Natural Resources index had a more challenging quarter with a return of -15.6%, but the trailing one-year return of 2.9% still well outperformed traditional equity strategies.
Of the three large-cap value strategies that came in the top 10, Mr. Welch said large weightings to energy helped drive performance. Of them, Greenwood Village, Colo.-based Peak Capital Management LLC benefited from having only 10 holdings and "two solid picks in AbbVie (Inc.) and Valero Energy (Corp.)."
He also said value strategies have generally performed more strongly than growth strategies the past year.
The overall three-month and one-year median returns for domestic value equities within the Morningstar separate account universe were -11.8% and -6%, respectively, well above the respective median returns for domestic growth equities of -19% and -22.7% for the periods.
Miller/Howard Investments Inc., Woodstock, N.Y., led the list of top domestic equity managers for the second quarter in a row.
Its North American energy strategy returned a gross 30.8% for the year ended June 30.
Michael Roomberg, portfolio manager, said the strategy was launched in 2011 when the company saw how it could capture emerging opportunities along the full- energy value chain given the technological advancements in shale.
The manager, which began as a research boutique in the 1980s, began investing in utilities the following decade and then later expanded further into the midstream space, so the strategy was a natural outgrowth of their efforts, Mr. Roomberg said.
He said the strategy's top performer was Occidental Petroleum Corp.
"They benefited greatly from higher oil prices which have really ameliorated the debt challenges of an ill-timed acquisition of Anadarko," Mr. Roomberg said.
Occidental acquired Anadarko Petroleum Corp. in 2019. He added that the position of the company in the energy strategy is "not just a beta play."
"We like the company's inventory depth and underappreciated chemical and midstream businesses," he said.
Cheniere Energy Inc. was also a significant contributor to the strategy's outperformance.
"It is the largest owner of liquified natural gas and export terminals in the U.S.," Mr. Roomberg said. "It highlights the example of having a big-picture perspective, which I think is one of our strengths."
The strategy has held the stock since 2017 when the company had a market capitalization of $10 billion. While he said short-term investors balked at the company's debt, it has benefited since then due to "strong and long-term contracts with utilities and other strong counterparties with good credit worthiness." The company now has a market cap of $35 billion.
Newton Investment Management North America LLC's global natural resources strategy was ranked second for the second straight quarter, returning a gross 30.16% for the year ended June 30.
Albert Chu, Boston-based portfolio manager, said the strategy is "pure alpha, both identifying the right stocks to own and the right commodities to own."
"When we look at the commodities sector, we see the wide dispersion, the difference between winners and losers," Mr. Chu said. "Any given year, bull market, bear market, it's wide."
The strategy, which is benchmarked to the S&P Global Natural Resources index, can buy pretty much any commodity, Mr. Chu said.
While he would not identify specific holdings that have contributed to the strategy's outperformance, he said the key to the strategy has been to "invest in the future, and that's where the most return potential comes."
As an example, he said the team realized "the demand for natural gas is not going to fall off the cliff as more renewables come on line." Noting that the supply of natural gas was going to be tight, that "unless you're situated in the area that's very blessed with natural gas, you're going to get hurt on a global basis," he said.
Orleans Capital Management Corp., Mandeville, La., ranked third for the year ended June 30, with its energy opportunities strategy returning a gross 18.03% for the period.
John M. Crain, research analyst, said that the strategy focuses on the best companies within the entire energy landscape. While he said the manager had a binary "oil-and-gas" view of the energy sector perhaps 10 years ago, the strategy has since moved onto all sources of energy, which could include anything from solar to wind power to hydrogen.
A worker cleans a machine at Southwestern Energy Co.'s natural gas production site at the Marcellus Shale formation in Pennsylvania.
In the last decade, the strategy has benefited from a defensive posture as energy prices plummeted.
"In the energy space, kind of long-only energy managers didn't survive through 2020. We were pretty defensive, and we did have a pretty good chunk of the portfolio'' allocated to clean, renewable energy sources. "We were essentially flat due to being defensive and having that kind of diversified allocation."
Once energy prices started to rise after 2020, the strategy pivoted back to traditional energy once analysts at the firm saw capital was pulling out of the space because "people were kind of burnt from the returns. In 2020, to invest in oil and gas was pretty much out of consensus and even today, it's pretty much a contrarian view."
He said that about 60% of the portfolio is currently in oil and gas, but he said he would argue that 15% to 20% of that should not solely be categorized that way. He cited Air Products and Chemicals Inc. as a significant driver of outperformance, and while the firm is perceived as an oil and gas company, it is involved in multiple energy products, he said.
"They're molecule-agnostic," Mr. Crain said. "They don't care what molecule is going to drive that energy future.
He also cited Chart Industries Inc., which is involved in natural gas liquification.
Ranked fourth was GQG Partners LLC's U.S. quality dividend income strategy, which returned a gross 14.3% for the year ended June 30.
Brian Kersmanc, Fort Lauderdale, Fla.-based senior investment analyst and deputy portfolio manager, said the strategy focuses on forward-looking high-quality companies.
"We're not trying to predict anything, but we're trying to prepare for eventual outcomes," Mr. Kersmanc said.
He noted that while several years ago the strategy was holding more growth-oriented companies, "we were prepared for that eventuality that maybe there was a little over-earning going on."
In addition, the portfolio took a fairly large weighting to the energy subsector, including Exxon Mobil Corp.
"We were seeing that after the boom-bust cycle in the energy complex, a lot of the marginal suppliers of capacity or production were cleaned out and the folks remaining were a lot more disciplined in terms of adding capacity."
Taking the fifth spot was Ninety One North America Inc.'s global natural resources strategy, which returned a gross 13.6% for the year ended June 30.
It was the second quarter in a row that the strategy was ranked fifth among domestic equity managers.
Tom Nelson, London-based co-head of thematic equity within the multiasset team and portfolio manager of energy and natural resources strategies, could not be immediately reached for further information.
In a May interview, he said the strategy has target allocations of about 40% each in energy and mining and 20% in agriculture, although Mr. Nelson said they can deviate significantly from that allocation.
For the five years ended June 30, six of the top 10 strategies were growth-oriented. Three of the growth strategies fell within Morningstar's small-cap category, two within large cap and one within midcap.
The overall median annualized return for domestic equities within the Morningstar separate account universe was 9.1% for the five years ended June 30, compared with the Russell 3000 index annualized return of 10.6% for the period.
The median annualized return in Morningstar's universe for overall growth strategies was 11.1%, while the annualized median return for the period for overall value strategies was 8.1%. The Russell 3000 Growth index and Russell 3000 Value index returned an annualized 13.6% and 10.6%, respectively, for the period.
The top performer for the five years ended June 30 was Minneapolis-based Next Century Growth Investors LLC, with its microcap growth strategy posting an annualized gross return of 28.8%.
Within the collective investment trust universe for the year ended June 30, the bottom half of the top 10 domestic equity CITs was comprised entirely of large-cap value strategies.
The top five consisted of two natural resources strategies, one energy strategy, a large-cap growth strategy and a real estate securities strategy.
Topping the list was the energy strategy, Boston-based Wellington Management Co. LLP's CIF research energy trust, which reported a net return of 19.7%. It was the second straight quarter the strategy led the collective investment trust rankings.
The median return of domestic equity collective investment trusts in Morningstar's universe for the year ended June 30 was -14.6%.
For the five years ended June 30, all of the top 10 collective investment trusts were large-cap growth trusts.
The top-ranked CIT for that period was the Macquarie Asset Management's large cap growth CIT, which had an annualized net return of 15.2%.
The median annualized return of domestic equity collective investment trusts in Morningstar's universe for the five years ended June 30 was 8.2%.
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 Aug. 10, and the CIT data were pulled Aug. 4.
