• / Free eNewsletters & Magazine
  • / My Account
Home>Research & Insights>Investment Insights>Four Small-Cap Funds That Have Ridden 2009's Rough Roads Well

Related Content

  1. Videos
  2. Articles

Four Small-Cap Funds That Have Ridden 2009's Rough Roads Well

This year certainly isn't the first time these funds have triumphed.

William Samuel Rocco, 08/11/2009

Small-cap funds have had to handle stomach-churning conditions thus far in 2009. Small-company stocks got crushed by a barrage of interrelated problems during in the first 10 weeks of this year, including increased pessimism about the global economy, additional weakness in corporate and consumer spending in the U.S., an ongoing dearth of affordable financing for smaller firms, and investors' continued aversion to taking on risk. As a result, small-cap funds lost a jarring 22% on average between January 1 and March 9 of this year.

Small-company stocks have rebounded furiously since then, though, as encouraging developments have occurred on the macroeconomic, corporate, and investor levels. For example, the U.S. and several other economies around the world have shown signs that they already have--or soon will--hit bottom; many prominent firms in hard-hit sectors like financials have made important improvements; and more and more investors have been finding equity valuations compelling and have been willing to take on risk. Thus, though they have hit some potholes along the way, small-cap funds have raced to a 60% gain from March 10 through July 30 on average.

In addition to the extreme ups and downs of their overall universe, small-cap funds have seen marked fluctuations in the performance of the various individual sectors. Small firms in the health-care and utilities sectors held up relatively well in the winter sell-off but have lagged during the spring and summer surge, whereas small companies in the basic-materials sector have done the opposite.

But as challenging as the past seven months have been, there are small-cap funds that have been able to maneuver through all the obstacles and deliver excellent returns. Some of the funds that have succeeded thus far in 2009 are middling--or subpar--offerings overall, but several of this year's winners are strong options. Here are the details on four of the very best ones.

A Bold Small-Value Hound Races Ahead
The typical member of the small-value group has posted a 15% return for the year to date through July 30, but Schneider Small Cap Value SCMVX is near the front of the pack with a 26% gain. Arnie Schneider has accomplished this feat by sticking to his guns. He's a bold investor who readily considers distressed companies, builds sizable positions in individual names, and loads up on opportunities in particular sectors as he looks for stocks that meet his strict valuation standards. These aggressive traits and some poor stock selection caused the fund to post huge absolute losses and lag nearly all its peers in awful 2008, but the opposite has been true as small-cap stocks have come roaring back in recent months. Indeed, this fund has gained roughly 30 percentage points more than the group norm of 68% since March 10, as Foundation Coal Holdings FCL, the telecom-software provider Openwave Systems OPWV, and a diverse mix of other picks have soared. And though his audacious approach has backfired on a number of occasions in the past--and causes considerable overall volatility--Schneider has generally executed it quite well: This fund has the best returns of any small-value offering by far on his 11-year watch.

A Straightforward Small-Blend Offering Cruises Along
Whitney George and Chip Skinner of Royce Low Priced Stock RYLPX don't do anything very fancy as they pursue stocks trading for less than $25 per share. Indeed, they move at a moderate pace. They look for healthy balance sheets and the ability to generate strong cash flows as well as attractive valuations; and while they are willing to build sizable sector overweights, they normally own around 200 stocks and limit individual positions to 2% of assets or less. But they've produced a 28% gain at this fund during the first seven months of 2009, while the average small-blend fund has earned a 16% return, as their longstanding--and considerable--commitment to hardware and commodity-related stocks has paid off and their stock selection in other areas has been good. This year is definitely no fluke. Though George and Skinner have had their rough spells, their decision-making has been on the mark far more often than not in the past, so this fund has strong long-term returns.

Two Fine Small-Growth Vehicles Fire on All Cylinders
The typical small-growth offering has delivered a 19% return for the year to date through July 30. Ken Gasaway, Robert Male, and Grant Sarris have steered Buffalo Small Cap BUFSX to a 28% gain, however, by following the same sensible theme-oriented approach they always have. The managers continue to look for high returns and solid balance sheets, carefully consider valuations, and take a long-term view as they rely on demographic, technology, and other themes to help shape the portfolio. This strategy has long led them to the hardware and consumer-services sectors, which have flourished thus far in 2009, and their security selection has been quite good in those sectors as well as others of late. P.F. Chang's China Bistro PFCB, which they've owned for years, is up more than 60% thus far in 2009, for example. Their themes and stock-picking prowess, as well as their high standards and patience, have also paid off in a variety of climates in the past, including 2008, when this fund lost less than nearly all its rivals. As a result, this fund sports a topnotch long-term record.

Meanwhile, Jeff Cardon has used a distinctive--and sound--strategy to deliver terrific results at Wasatch Small Cap Growth WAAEX this year. Cardon demands high returns on capital and other fundamental strengths, insists on superior finances, and pays significant attention to overseas opportunities as he invests in a mix of steady growers and high-growth companies, so the fund normally stands out from the small-growth crowd. This approach has led him to a many impressive gainers in 2009, including the analog-circuit maker Power Integrations POWI and the Indian IT-services provider Cognizant Technology Solutions CTSH. This fund, as a result, has gained 29% over the past seven months. And while it has tended to be a middling performer in past speculative and cyclical rallies--largely due to Cardon's high-quality bias--it has fared quite well in most other conditions and has suffered relatively limited volatility along the way. Thus, this fund boasts an impressive long-term risk/reward profile.

blog comments powered by Disqus
Upcoming Events
Conferences
Webinars

©2014 Morningstar Advisor. All right reserved.