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A Small-Cap Fund Near the Top of Its Class

Silver-rated Conestoga Small Cap has weathered recent retirements well, but the next challenge is capacity.


Tony Thomas: The managers of Conestoga Small Cap use a conservative, high-quality approach that has kept this fund near the top of its class. They've also carefully planned for and executed a few recent changes to their investment team, and similar thoughtfulness will be needed as the strategy nears capacity. The fund earns a Morningstar Analyst Rating of Silver.

The Wayne, Pennsylvania-based team of Bob Mitchell and Joe Monahan invest in small-cap firms that have rolling three-year average market caps of $2.5 billion or less at the time of purchase. They prefer firms with strong growth characteristics, including the ability to grow earnings and returns on equity at a 15% annual clip over the next three to five years. They also prefer firms with low debt and significant insider ownership. The team invests with conviction, usually holding 45-55 names and keeping turnover below 25%.

This approach has produced attractive results. The fund's returns ranked in the top decile of its small growth Morningstar Category in each of the past one-, three-, five-, 10-, and 15-year periods through September 2017. The emphasis on quality firms has tamped down volatility and offered some downside protection relative to its peers and its Russell 2000 Growth benchmark since the fund's October 2002 inception.

The team has maintained good performance despite some recent retirements from the small investment team at Conestoga Capital Advisors. The employee-owned firm telegraphed succession plans up front, and it has executed these plans faithfully so far. The next challenge is capacity. Conestoga Small Cap's success has drawn inflows, and total assets in the strategy (including the fund and some separate accounts) are just over $2 billion, approaching the strategy's estimated $2.5 billion capacity. The firm is already planning for what would be the first fund closure in its history. Provided that it executes well, investors should continue to be rewarded by this team's conservative, long-term approach to investing.

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