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Dependable Small-Growth Funds Do Exist

Use stringent criteria to find the best choices in this dicey category.

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Pity the poor small-growth fund. The category didn't benefit much from the runup in the financial sector or housing industry in the middle of this decade--those areas were primarily seized on by value managers (though some bolder small-growth skippers did invest heavily in rallying energy service firms). And the category was hammered in the October 2007-March 2009 bear market: The typical small-growth fund lost 58%. Finally, the funds have bounced back nicely in the ensuing rally, but the category trails both the large- and mid-growth categories in 2009 through Dec. 11. All told, this is the worst-performing domestic-stock fund category of the nine represented by the Morningstar Style Box over the trailing five years.

Could this category be a contrarian play? Perhaps, but investors would do well to stick with the most-solid funds in the group given its inherent volatility and the sheer number of speculative firms that dot this corner of the style box. To find such funds, we fired up the  Morningstar Premium Fund Screener on First, we searched for distinct funds within the category with managers who have been at the helm for at least a decade; veteran skippers should prove particularly valuable in sorting out the keepers and the flashes in the pan in small-growth land. We also wanted funds that charge below-average expense ratios and have outpaced 75% of their category peers over the past 10 years. And while year-to-date relative performance may not be a great asset given the rather speculative nature of the rally, funds that have beaten two thirds of their rivals during the ups and downs of the past three years are quite appealing. Finally, we set the screens to isolate funds that are covered by our fund analysts, are open to investors, and can be purchased for $10,000 or less.

As of Dec. 14, 2009, the Premium Screener returned five funds. To see the results for yourself,  click here.

Greg Carlson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.