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4 Small Funds That Are Worth a Look

We hunt down medalist funds with the ability to be nimble.

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Is there such a thing as having too much money?

For successful funds, the answer is yes. 

Managers of funds that have grown too large usually have to choose between one of a few courses of action, none of them particularly attractive. First, the manager could stick with the same types of companies he or she always did but just find more of them. The problem is that an investor's 101st "best idea" is rarely as good as the top holdings in the portfolio. 

Alternatively, the manager could graduate into securities where there's more liquidity; that way he or she could move large sums of money into individual positions without affecting their share prices along the way. Yet, owning larger-cap, higher-liquidity securities has the potential to take the fund away from its original mission, especially if small- and mid-cap stocks contributed to its success in the past. 

The fund world is littered with examples of funds that grew too large for their own good.  Fidelity Magellan (FMAGX) is the best-known example. As assets grew in the late 1990s and early '00s, the fund's unwieldy portfolio began to look a lot like the S&P 500--albeit with higher fees than an S&P 500 Index fund. Even Warren Buffett has acknowledged the drawbacks of being too large, writing of Berkshire Hathaway in 2012, "Because of our present size, making acquisitions that are both meaningful and sensible is now more difficult than it has been during most of our years." 

On the flip side, being nimble can confer an advantage. If a fund doesn't have to own the same fare its peers own and instead can take sizable positions in less heavily trafficked names, it's easier to put up performance that's different from--and better than--rival funds and the benchmark. That's why Morningstar analysts try to draw attention to worthy funds with small asset bases. 

To help identify today's hidden gems, I turned to  Morningstar's Premium Fund Screener. I started by searching for funds with asset bases of less than $500 million that earn Morningstar Medalist ratings of Silver or higher. And because being small is especially beneficial for equity funds that are apt to delve into small and midsize companies, I screened for funds with average market capitalizations of $10 billion or less. I also eliminated funds of funds and index funds from the search, because a small asset base provides no special advantage to these fund types. Funds of funds may be small themselves, but their underlying funds may be large pools of money; index funds, meanwhile, are charged with tracking their benchmarks. 

The resulting screen highlights some lesser-known funds in which Morningstar analysts have a high level of conviction. Premium users can click  here to tweak the screen to suit their own parameters. 

 Berwyn (BERWX)
Category: Small Blend | Analyst Rating: Silver
Look beyond this fund's abysmal losses so far in 2014. Micro-cap stocks, in which Berwyn stakes more than three fourths of its assets, have struggled relative to other small caps so far in 2014. Moreover, the fund's emphasis on the energy and basic-materials sectors have hurt performance. But senior analyst Greg Carlson likes management's patient, quality-conscious process; it seeks out financially sound, cash-flow-generating companies that it believes are temporarily downtrodden. Moreover, the fund's recently weak performance appears to be slowing interest in the fund, which should help it maintain its hidden-gem status: Assets have dropped by nearly a fourth since the end of 2013. 

 Columbia Acorn International Select (ACFFX)
Category: Foreign Small/Mid Growth | Analyst Rating: Silver
Senior analyst Bill Rocco notes that this foreign small/mid-growth fund stands out from its peers in a few key ways. Whereas some funds in the group--including sibling  Columbia Acorn International (ACINX)--maintain diffuse portfolios to reduce the potential for stock-specific blowups and to help them manage more in assets, this fund maintains a concentrated portfolio of just 44-50 holdings. (Management would rather own larger-cap stocks than become less concentrated.) And while management looks for strong, high-quality growers, it's not inclined to overpay for them. Given this idiosyncratic strategy, it's not surprising that the fund's performance pattern has looked different from its peers': It has tended to underperform in rallies, while holding up relatively well in sell-offs. The no-load Z share class is closed to new investors, but investors can buy the A, B, and C share classes through financial advisors. 

 FPA Perennial (FPPFX)
Category: Mid-Cap Growth | Analyst Rating: Silver
The spring 2014 departure of a longtime comanager, Steven Geist, prompted an Analyst Rating downgrade from Gold to Silver for this fund. But Morningstar analysts still think highly of it. Remaining comanagers Eric Ende and Greg Herr continue to ply the same patient, valuation- and quality-conscious strategy that sets the fund apart from many of its mid-growth peers. The fund is in the midst of a remarkably strong performance streak, and it's unrealistic to expect that management will be able to keep it up. That said, its approach is sensible, and FPA has proven itself a strong steward at this and other offerings.

 Weitz Hickory (WEHIX)
Category: Mid-Cap Blend | Analyst Rating: Silver
Although this fund's one- and three-year performance numbers are relatively weak, senior analyst Kevin McDevitt believes that the reasons for its underperformance are defensible. Comanagers Wally and Drew Weitz have been taking profits on highly appreciated positions and have been unable to find enough new names selling at a deep enough discount to their estimates of intrinsic value. Thus, cash stood at roughly 20% of the portfolio at the end of September. But McDevitt believes the fund will hold its ground better than its peers in weak markets: The cash will not only cushion on the downside, but it will also enable the managers to go shopping in a more attractively valued market.

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