Going Small but Standing Tall

As readers of our recent articles looking at upside and downside capture ratio among large-cap stock and intermediate-bond funds already know, these metrics can be a useful guide in identifying funds that perform well in both rising and falling markets. Many funds are able to outperform when the market is really cooking, and they can limit losses during downturns. But it's the rare fund that succeeds at both.

This week we turn our attention to small- and mid-cap stock funds. As discussed previously, upside and downside capture ratios are calculated based on a fund's performance relative to a benchmark in months that the benchmark went up or down. An upside capture ratio above 100 means a fund's total return exceeded that of the benchmark in months when the benchmark rose, while a downside capture ratio below 100 means the fund loss less than the benchmark in months when the benchmark fell.

These data can be found for any fund by going to the fund's page on Morningstar.com and clicking on the Ratings & Risk tab (below the fund's name and to the right of the Quote tab). You'll find the Upside & Downside Capture Ratio data toward the bottom. A category average is also provided, as are calculations for the trailing one-, three-, five-, 10-, and 15-year time periods.

An important thing to keep in mind when looking at upside and downside capture among small- and mid-cap funds is that the benchmark Morningstar uses to calculate these metrics for all U.S.-equity funds is the S&P 500, which is made up primarily of large-cap stocks. Given that small- and mid-cap stocks tend to be more volatile than large caps, one might assume it would be difficult for funds that primarily own smaller names to outpace the index to both the upside and downside. Yet a select group of small- and mid-cap stock funds have managed to do so during the past decade.

Below is a list of funds that not only meet this criteria but that have the biggest gap between these two measures, meaning they've been exceptionally good performers to the upside, to the downside, or both. The list excludes institutional funds and uses A share-class data for load funds when possible for the sake of consistency.

Funds With Biggest 10-Year Upside/Downside Capture Ratio Gap
Fund	Category	Upside Capture Ratio	Downside Capture Ratio	Difference	Star Rating	Analyst Rating
JPMorgan Sm Cp Eq* (VSEAX)	Sm Growth	121.04	99.43	21.61		Neutral
TETON Wd Mt Mts (WMMAX)	Sm Blend	101.21	79.68	21.53		N/A
Eatn Atlta Cp SMID* (EAASX)	Md Growth	113.23	94.23	19.00		Silver
FMI Common Stk* (FMIMX)	Md Blend	106.59	88.14	18.45		Gold
Am Cent Md Val* (ACMVX)	Md Value	103.24	85.76	17.48		Silver
Artisan Mid Value* (ARTQX)	Md Value	114.50	97.42	17.08		Gold
Neubrgr Brm Gens (NBGNX)	Md Growth	104.75	88.53	16.22		Silver
Hennessy Foc (HFCSX)	Md Growth	113.01	96.92	16.09		N/A
Principal Mid* (PEMGX)	Md Growth	106.32	90.28	16.05		Silver
Westport	Md Growth	103.27	87.66	15.61		Silver
Victory Estb Val (VETAX)	Md Value	112.22	97.74	14.48		N/A
Ivy Mid Growth (WMGAX)	Md Growth	112.64	99.31	13.34		Bronze
Prdntl Jenisn Md Gr* (PEEAX)	Md Growth	113.14	99.81	13.33		Bronze
Allianz NFJ Sm Val* (PCVAX)	Sm Value	111.40	98.34	13.06		Silver
Reynolds Blu Chp Gr (RBCGX)	Md Growth	100.68	88.67	12.00		N/A
Vanguard Sel Val (VASVX)	Md Value	110.91	98.93	11.98		Gold
Franklin MicrCp Val* (FRMCX)	Sm Value	101.69	90.29	11.40		Silver
JPMorgan Mid Val* (JAMCX)	Md Value	104.36	92.97	11.38		Silver
ING JPMrgn Mid Val* (IJMSX)	Md Value	104.39	93.12	11.28		N/A
Wells Ad Spc Md Val	Md Value	105.46	94.51	10.95		N/A
Data as of March 31 * These funds are closed to new investors.

One might expect mid-cap funds to have a slight advantage here given that they tend to be less volatile than small-cap funds. To illustrate, consider that the average large-blend fund's standard deviation--a measure of volatility--during the past decade has been 15.29. The average mid-blend fund's has been 18.23, and the average small-blend fund's has been 19.11. Yet the top two funds on our list of upside/downside achievers are small-cap funds, led by  JPMorgan Small Cap Equity (VSEAX), with an impressive upside capture ratio of 121.04 and a respectable downside capture ratio of 99.43. The fund, which is currently closed to new investors, has been among the small growth category's best performers during the past decade, returning 12.83% annually as of March 31. That's more than 4 percentage points better than its category average and 5 percentage points better than the S&P 500 during that time. However, most of that impressive record took place under former manager Glenn Gawronski, who left the fund in February 2013, which is why the fund carries a Neutral Morningstar Analyst Rating for Funds (it had previously been Bronze).

The rest of our list includes several small- and mid-cap funds our analysts like. However, some funds on the list are currently closed following strong recent performances, meaning that investors who don't already own them can't buy them now. Closing funds when their asset bases have grown too large for management to effectively execute a particular strategy is generally a positive stewardship move, but it does limit the choices for those hoping to use the above list as a starting point in shopping for a small- or mid-cap fund. Such fund closings also serve as an important reminder that valuations among the types of stocks targeted by these funds may be running high, so proceed with caution.

With any of fund, remember that even though long-term performance is important, near-term performance can also be telling. So pay attention not only to the fund's 10-year upside and downside capture ratios, but how it has performed lately, as well. A strong early performance during the course of a decade can obscure more recent hiccups, so look at one- and three-year data, too.