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By Russel Kinnel and Christine Benz | 08-19-2015 03:00 PM

3 of the Best Small-Value Funds Today

American Beacon Small Cap Value and Diamond Hill Small Cap are two strong active options that are still accepting new investors, while Vanguard Small Cap Value is a great passive choice, says Morningstar's Russ Kinnel.

Christine Benz: Hi, I'm Christine Benz for The small-cap value category is the worst-performing diversified domestic-equity category over almost every trailing time period. Joining me to discuss the case for small-cap value and to share some small-cap value fund picks is Russ Kinnel--he is director of fund research for Morningstar.

Russ, thank you so much for being here.

Russ Kinnel: Good to be here.

Benz: Russ, looking at these performance statistics, small-cap value really hasn't been the place to be during this current rally. But let's discuss the case for making a place in your portfolio for this category. There's certainly some long-term data that point to the value of having small-value stocks, but even maybe contrarians might be looking at small value right now.

Kinnel: That's right. As a contrarian, you might remember that the last time small value really lagged was in 2000 and, at that point, it would have been the best place to invest. I don't think it's as extreme an underperformance as that time, but there's still a good reason to go in. Also, even though there's a little bit of small-cap risk compared with large, small value tends to be fairly sleepy, so you're not really adding a lot of risk. You're getting some good diversifiers when you go into small value.

Benz: The tricky part for fund investors looking at this category is that a lot of our favorite funds are closed to new investors. Let's discuss why it's so important for small-cap funds, in general, to keep an eye on capacity. Also, before we get into some of the open funds that you would recommend, let's discuss some of the good funds that are closed today.

Kinnel: So, many of the small-cap funds do close to new investors. The reason is that small caps don't have a lot of liquidity; there can be a bigger bid-ask spread. What that means is, as a small-cap fund gets larger, it may incur more trading costs; it may have to start avoiding more and more of the small-cap universe as it moves up and gets bigger. So, there are a number of ways it can cause performance to deteriorate.

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