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Good Smaller-Cap World-Stock Funds Hard to Find

But flexible investors do have a few fine options for global small-cap exposure.

William Samuel Rocco, 05/31/2011

The case for global smaller-cap funds is clear. Such funds have significant diversification value as well as considerable capital-appreciation potential. The small-cap space is less closely followed and thus less efficient than the large-cap space, particularly outside the United States, so managers of such funds have ample opportunity to add lots of value. That's because these managers have the freedom to go wherever the top smaller companies are, while their U.S., foreign, and regional counterparts do not.

But finding good global smaller-cap funds is much easier said than done. More than three fourths of world-stock funds are large-cap offerings. Most of the rest are all-cap vehicles rather than genuine smaller-cap funds. And even the best of the all-cap world-stock vehicles are unlikely to satisfy investors seeking global small-cap exposure due to their often sizable stakes in large-cap stocks.

Meanwhile, many of the true global smaller-cap funds have one or more flaws that render them unattractive. Some of them are in unproven hands or have seen significant manager turnover in recent years, for example, while others employ overly bold strategies or have posted disappointing results given how well small-cap stocks have performed in the 2000s.

But investors seeking global smaller-cap exposure needn't give up. There are a couple of front-load world-stock funds that focus on smaller caps and are quite attractive overall.

On the no-load side, there is one such offering that has lots of potential. And there are a pair of no-load small-cap domestic-equity funds that pay significant attention to overseas opportunities and are proven winners. Here are the details on all five funds.

Two Fetching Front-Load World-Stock Vehicles
American Funds SMALLCAP World SMCWX: This front-load fund has nearly $24 billion in assets, so it is anything but nimble. But it is run by 13 managers who operate independently of each other and follow a variety of fundamentals-driven strategies. Both attributes help offset the challenges of running a small-cap offering with such a huge asset base. The portfolio's average market cap hovers around $2 billion, in fact, so this fund delivers genuine smaller-cap exposure, and the managers are willing to hold some cash, which lowers risk.

Meanwhile, the managers have added value with their stock selection in a mix of climates throughout the 2000s, and this fund has outpaced the typical global smaller-cap offering during the trailing five- and 10-year periods while incurring relatively moderate volatility. An attractive expense ratio of just 1.13% adds to its appeal.

BlackRock Global Small Cap MDGCX: This front-load fund takes a relatively temperate approach to investing in smaller firms. Murali Balaraman and John Coyle, who took the helm in March 2005 after serving as analysts for several years, invest in both growth and value stocks, avoid big country bets, and pay ample attention to issue diversification as they pursue small and midsized firms with strong management teams and straightforward business models.

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