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Real estate investmenttrusts continued toperform well for thesecond quarter in arow for the year endedMarch 31, accounting

for five of the top 10 spots inMorningstar Inc.’s domestic equityseparate account/collective invest-ment trust database.

There was less of an overall domi-nance, however, than the fourthquarter, in which real estate securi-ties and REITs accounted for eight ofthe top 10 overall domestic equitystrategies in the year ended Dec. 31.

For the year, the remainder of thetop 10 was a relatively even mix oftraditional domestic equity strategies.

Nicholas Sundberg, data analyst —separate accounts at MorningstarInc., Chicago, said there was no realdominant equity style for the year. He

said the mix of styles “probablyrelates more to the strength of theindividual strategies than anythingasset class-based.” The median returnof domestic equity strategies in theMorningstar universe for the year

ended March 31 was 10.85%. TheRussell 3000 index returned 12.37% inthe same period.

Mazama Capital Management Inc.took both first and second places inthe top 10.

SPECIAL REPORT TOP-PERFORMING MANAGERSTOP-PERFORMING MANAGERSSPECIAL REPORT

Continuity is watchword for equity, bondsREITs remain hot for

year, accounting for half of top 10 strategies

By ROB KOZLOWSKI

E Q U I T Y M A N A G E R S

BIG BOOST: Adelante’s Jeung S. Hyun said low interest rates are one reason for higher REIT returns.

Mitch Tobias

May 4, 2015

Mazama’s emerging managersmall-cap growth strategy returneda gross 37.95% for the year, followedby the manager’s small/midcapgrowth strategy with 31.65%.

Ron A. Sauer, founder, CEO andchief investment officer of Portland,Ore.-based Mazama, said bothstrategies benefited from the firm’sexperience as well as its familiaritywith newer companies.

“Between us all we have over 120years of experience following the bigfour (sectors), and all of us attendindustry events to keep current onnot only the companies that aredoing the best today but the emerg-ing companies in the industries thathave new products, new services thattheir customers are really excitedabout,” Mr. Sauer said.

“We have a lot of younger compa-nies that a lot of managers don’t fol-low that closely that … are mean-ingful contributors to our portfo-lios,” he added.

Regarding the emerging small-capstrategy, “what’s really special aboutit … the average weighted market-cap of that portfolio is $1 billion andthe average weight market cap of theRussell 2000 is over $2 billion.”

“We are taking the highest qualityemerging small companies we canfind in the country, much higherquality than a microcap portfolio,and we think it’s the same quality orclose to the Russell 2000 Growth, it’sa great risk-reward proposition.”

It is the second quarter in a rowthat the Mazama’s emerging small-cap growth was the top-performingstrategy and companies like special-ty retailer Zumiez Inc. and technologycompany Universal Display Corp.greatly contributed to the strategy’ssuccess.

Universal Display, which providesdisplays for some Apple Inc. prod-ucts, also reflects Mazama’s deepindustry research, said Mr. Sauer.“The industry research we’re doingis really paying off. … (W)e do a lot ofresearch on Apple and a lot ofinsights on their suppliers and part-ners, and some of these are reallysmall companies,” Mr. Sauer said. “It’svery helpful to us.”

Another Apple supplier, semicon-ductor company Skyworks SolutionsInc., has been a great driver in theperformance of the small-midcapgrowth strategy, Mr. Sauer said.

“Here’s a company I’ve known for20 years,” Mr. Sauer said. “They had amonstrous last 12 months becausethey gained market share in the

iPhone 6 families.”“They’ve had over double earnings

growth in two years and close to dou-ble revenues for two years in June, sotheir market cap during that periodhas gone from $3.5 billion up to $18billion,” Mr. Sauer said. “We’ve had thisin the small portfolio till just recentlyand we had to graduate it out.”

PIMCO’s StocksPLUSPacific Investment Management

Co.’s StocksPLUS long-duration strate-gy ranked third, with a gross 29.36%return in the year ended March 31. Thestrategy combines S&P 500 derivativeswith a portfolio of long-duration bonds.

“What we really wanted to do wascreate a vehicle for the corporatepension (fund that) wanted to main-

May 4, 2015

Gross NetOne-year return Style return return

Mazama Emerging Small-Cap Growth U.S. SA small-cap growth 37.95% 36.68%

Mazama Small-Midcap Growth U.S. SA midcap growth 31.65% 30.50%

PIMCO StocksPLUS Long Duration U.S. SA large-cap value 29.36% 28.75%

Adelante Total Return Fund U.S. SA real estate 28.70% 27.39%

Chilton Capital REIT U.S. SA real estate 28.64% 27.61%

Mazama Select Growth U.S. SA large-cap growth 28.12% 27.16%

Cornerstone U.S. REIT Total Return U.S. SA real estate 27.75% 27.15%

PGI Real Estate Equity Securities U.S. SA real estate 27.73% 27.04%

Wellington Real Estate Securities U.S. SA real estate 27.35% 26.42%

RBC GAM Conc. Midcap Value Equity U.S. SA midcap blend 27.34% 26.14%

Gross NetFive-year return Style return return

Naylor Core U.S. SA midcap growth 27.41% 24.74%

Chickasaw MLP SMA U.S. SA energy limited partnership 26.86% 26.03%

PIMCO StocksPLUS Long Duration U.S. SA large-cap value 25.71% 25.09%

Yorkville MLP Core Income Strategy U.S. SA energy limited partnership 24.13% 21.62%

Allianz U.S. Ultra Micro Cap U.S. SA small-cap growth 24.06% 22.78%

Cushing MLP Alpha Total Return Strategy U.S. SA energy limited partnership 23.97% 23.10%

MAI Energy Infrastructure & MLP Strategy U.S. SA energy limited partnership 23.80% 22.59%

Harvest MLP Alpha Strategy U.S. SA energy limited partnership 23.75% 22.92%

NBW Capital MLP (Formerly Taylor MLP) U.S. SA energy limited partnership 23.64% 22.60%

Analytic Small-Midcap Equity U.S. SA small-cap value 23.22% 22.24%

Source Morningstar. Returns as of March 31, 2015.

Top-performing managers: SMA overall domestic equity

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May 4, 2015

tain equity exposure but have theirfixed-income exposure doing some-thing closer to the liabilities,” saidSteve A. Rodosky, Newport Beach,Calif.-based managing director andportfolio manager.

Much of the driver of the growth ofthe strategy is due to far better fixed-income performance in the past yearthan anticipated due to interest ratescontinuing to remain low.

Adelante Capital ManagementLLC’s Total Return Strategy rankedNo. 4 overall for domestic equity sep-arate accounts, with a gross return of27.4%. The strategy only has realestate investment trusts in its portfo-lio or real estate securities with sim-ilar cash-flow characteristics, saidJeung S. Hyun, Oakland, Calif.-basedprincipal and portfolio manager, in atelephone interview.

“We’re obviously trying to deliverat least 100 basis points net of fees toour clients in that strategy above ourbenchmark, which is the Dow JonesWilshire REIT index,” Mr. Hyun said.

That index returned 25.2% in theyear ended March 31. Mr. Hyun saidthe overall success of REITs in thepast year is due in part to what he callsa “benign interest rate environment.”

“I think there’s a perception in thepublic that REITs are interest rate sen-sitive and — unlike what happened in2013 when we went though a tapertantrum — I think there’s a perceptionthat the rates are going to stay fairlybenign in the foreseeable future.”

Mr. Hyun said the total returnstrategy itself benefited fromAdelante’s size. The money managerhas $2.4 billion in assets under man-agement, including $1.5 billion in thestrategy, which is on the smaller sideof REIT managers. That size “hasgiven us the flexibility to invest insome of the smaller REITs in thespace where we find attractive value,”

Mr. Hyun said. “Take for example acompany with a market cap of, say$500 million. Some of the larger play-ers in the space, their investment inthe company is not going to be mean-ingful for their performance.”

One such holding is CoreSite RealtyCorp., which operates data centersacross the U.S. “It’s one of the smallernames in the index,” Mr. Hyun said.“It’s less than half a percent of theindex … it was the second best-per-forming REIT in the space … (and)we’re the sixth largest shareholder.”

Ranking fifth was Chilton CapitalManagement LLC’s real estateinvestment trust strategy, with agross return of 28.64% in the yearended March 31.

Matt Werner, an analyst and REITportfolio manager at Houston-basedChilton, said the drop in 10-yearTreasury rates contributed to theoverall performance of REITs, butalso higher rents.

“There has been very little newsupply,” Mr. Werner said. “Whenyou’re currently with well-locatedproperties, it gives you the ability toraise rents on your tenant and thathas helped drive REIT valuations.”

Specific to Chilton’s strategy, theperformance of two REITs that hadrecently been purchased, AmREIT Inc.and Granite Real Estate InvestmentTrust, contributed to its outperfor-mance, and the self-storage and datacenter sectors also performedextremely well, Mr. Werner said.

Naylor & Co. Investments LLC, SanFrancisco, led the five-year compositerankings with its core composite strategy,which returned a gross aggregate 27.41% for the five years ended March 31.

The strategy has a focused portfolioof 35 to 45 stocks in four to six “recov-ering industries” ranging from micro-cap to large-cap companies.Morningstar categorizes the strategy

as midcap growth based on most hold-ings falling within that asset class.

The rest of the top five overalldomestic equity strategies in the fiveyears ended March 31 were:Chickasaw Capital ManagementLLC’s MLP strategy, with an aggre-gate gross return of 26.86%; PIMCO’sStocksPLUS strategy, at 25.71%;Yorkville Capital Management LLC’sMLP core income strategy, at 24.13%;and Allianz Global Investors’ U.S.ultra microcap strategy, at 24.13%.

The median five-year returnamong all domestic equity managersin the Morningstar universe was anaggregate 15.01%, above the Russell3000’s 14.71% in the same period.

In the collective investment trustuniverse, the FMT/T. Rowe Pricehealth sciences strategy led alldomestic equity managers with a netreturn of 41.42% for the year endedMarch 31.

The rest of the top five CIT strate-gies for the year ended March 31 were:the J.P. Morgan Chase Bank U.S. realestate securities fund, with a one-yearnet return of 26.38%; the WilmingtonTrust Fiduciary Services Co.’s totalreturn REIT fund, 25.80%; AmericanCentury’s U.S. Real Estate SecuritiesTrust, 25.46%; and State Street GlobalAdvisors’ REIT index fund, 25.15%.

All of the data for Pensions &Investments’ quarterly top-per-forming managers report are pro-vided from Morningstar’s globalseparate account/collective invest-ment trust database. For informa-tion on the database, please contactseparateaccounts@morningstar.comor call 312-384-4087. �