Small-Value Funds Worth a Look
Four leading funds in a lagging category.
It has been a sluggish bull market lately for value investors, particularly those of the small-cap persuasion.
Through October 2017, the small-value Morningstar Category were lagging most other peer groups' trailing returns for the year to date, one-, three-, and five-year periods. Perhaps that means it's time to take a closer look at some of our best ideas among value-oriented small-cap equity funds.
Janus Henderson Small Cap Value (JSCVX), which has a Morningstar Analyst Rating of Silver, should hold up well in the wake of some manager changes. A large, seasoned team of managers and analysts at this fund, formerly known as Perkins Small Cap Value, has been able to compensate for the 2013 departure of 15-year veteran Todd Perkins.
They also should handle the October departure of Tom Reynolds, a comanager since April 2013, for Artisan Partners. Current lead managers Justin Tugman, Craig Kempler, and Bob Perkins still adhere to the firm's time-tested process that looks for quality companies whose share prices offer reasonable margins of safety.
The fund has still been able to provide downside protection and decent upside participation. Since the fund got its Silver medal in July 2013, it has posted competitive returns with the small-value category and the Russell 2000 Value Index. Perkins Investment Management, which is owned by Janus Henderson Investors, is known for watching capacity, but this fund remains open to new investors.
Concerns about a growing helping of companies with above-average debt levels contributed to Diamond Hill Small Cap's (DHSCX) Analyst Rating dropping to Silver from Gold near the end of 2016. Lead manager Tom Schindler has almost two decades of experience on this fund and with Diamond Hill's approach, which seeks to buy stocks trading below the managers' intrinsic value estimates and hold them until those margins of safety close.
It's still a strong option, but it could experience more bumps because of the above-average debt/capital ratio of its typical portfolio holdings. During Schindler's entire tenure dating back to December 2000 through October 2017, the fund has gained 10.7% annualized versus 9.3% for the Russell 2000 Value Index and 9.2% for the small-value category.
Royce Special Equity's (RYSEX) rating slipped to Silver from Gold earlier this year--but not because we think any less of its venerable manager Charlie Dreifus. Rather, the change recognized that the more than 70-year-old stock-picker is nearer to the end of his career than its start, and it would be difficult for anyone, including comanager Steven McBoyle, to replicate his excellent long-term record.
Performance has been sluggish lately because the fund has an above-average cash stake and a more-conservative portfolio of financially solid, competitively sound, but still-cheap stocks. Its unique focus on firms with cautious accounting practices and low valuations should help it make up ground when the stock market tumbles. And McBoyle is a capable successor whenever Dreifus steps away. During Dreifus' entire tenure, the fund has returned 9.3% annualized through October 2017, versus 8.3% for the Russell 2000 Value Index, and has done so with much less risk than the index and peers.
Bronze-rated T. Rowe Price Small-Cap Value (PRSVX) has been solid since David Wagner took over. It returned 9.2% annualized from June 2014 through July 2017, beating the small-value and small-blend categories gains of 6.5% to 7%, as well as the Russell 2000 and Russell 2000 Value indexes' gains of 8% to 8.7%. Wagner hadn't run a multibillion-dollar fund before this assignment, but T. Rowe Price has shown again that it handles transitions well.
Dan Culloton has a position in the following securities mentioned above: RYSEX. Find out about Morningstar’s editorial policies.