2 Top-Performing Small-Growth Funds

Small-cap stocks give investors opportunity to buy into companies early in their growth trajectory, when they can either take off or flounder. For investors willing to take on the risk, these funds are among the best options, according to Morningstar analysts.

To screen for the top-performing funds within the small-growth category, we looked for those with the best returns over the last one-, three-, and five-year periods. Both names that passed the screen were actively managed and earn Morningstar Medalist Ratings.

• Federated Hermes MDT Small Cap Growth Fund QLSGX
• Invesco Discovery Fund ODIIX

Small-Growth Funds Performance

Over the last 12 months, the small growth Morningstar Category returned 12.81%. On an annualized rate, these funds have returned 13.08% over the last three years and 7.43% over the last five. That compares with the Morningstar US Market Index, which has returned 19.79% over the last 12 months, 23.08% per year over the last three years, and 16.10% per year over the last five years.

What Are Small-Growth Funds?

Small-growth portfolios focus on faster-growing companies whose shares are at the lower end of the market-capitalization range. These portfolios tend to favor companies in up-and-coming industries or young firms in their early growth stages. Because these businesses are fast-growing and often richly valued, their stocks tend to be volatile.

Stocks in the bottom 10% of the capitalization of the US equity market are defined as small-cap. Growth is defined based on fast growth (high growth rates for earnings, sales, book value, and cash flow) and high valuations (high price ratios and low dividend yields).

Screening for the Top-Performing Small-Growth Funds

We looked at returns data from the past one, three, and five years using Morningstar Direct. We screened for open-ended and exchange-traded funds in the top 33% of the category using their lowest-cost primary share classes for those periods. We also filtered for funds with a Morningstar Medalist Rating of Bronze, Silver, or Gold. We excluded funds with assets under $100 million and analyst coverage that was not 100%. This left two investments.

Because the screen was created with the lowest-cost share class for each fund, some may be listed with share classes that are not accessible to individual investors outside of retirement plans, or they may be aimed at institutional investors and require large minimum investments. The individual investor versions of those funds may carry higher fees, reducing returns to shareholders. In addition, Medalist Ratings may differ among the share classes of a fund.

Federated Hermes MDT Small Cap Growth Fund

• Morningstar Medalist Rating: Bronze
• Morningstar Rating: ★★★★

The $576.5 million fund has climbed 22.63% over the past year, outperforming the average fund in its category, which rose 12.81%. The Federated Hermes fund, which launched in June 2016, has climbed 18.30% over the past three years and 11.49% over the past five.

“This strategy’s quantitative process aims to tap diverse alpha sources in a single approach. Its model assesses stocks on a multitude of various combinations of 16 factors. The factors generally incorporate metrics of valuation, quality, and technicals, with examples such as earnings/price trend, earnings repeatability, and five-year return. The firm’s research suggests that while individual factors aren’t especially predictive on their own, they grow much more effective when combined with other factors.

“A random forest model tests thousands of potential factor combinations based on 30-plus years of US stock data and adjusts to the market environment. Results have been noticeably better since the model’s introduction in 2013, improving upon its less-flexible initial design with different avenues to produce outperformance. The managers continually improve the models through updates twice a year.

“Since moving to the random forest approach, the mutual fund’s institutional shares have easily outpaced their Russell 2000 Growth Index benchmark and typical small-growth Morningstar Category peer, on both total return and risk-adjusted bases. The model will lean on the momentum factor at times, which can make performance bumpy, but over longer periods outperformance has been fairly consistent. It has topped its benchmark in about 70% of rolling three-year periods and in 90% of rolling five-year periods. At the right price, this is a decent option for small-growth investors.”

—Drew Carter, analyst

Invesco Discovery Fund

• Morningstar Medalist Rating: Silver
• Morningstar Rating: ★★★★

Over the past year, the $5.9 billion fund has gained 19.67%, while the average fund in its category is up 12.81%. The Invesco fund, which launched in January 2012, has climbed 17.86% over the past three years and 9.61% over the past five.

“Invesco Discovery’s proven, experienced management team and sound approach make it an appealing small-growth choice. This fund has amassed an impressive record since lead manager Ron Zibelli and his team took over in 2006. Over the 10- and 15-year periods through May 31, 2025, the Y shares have handily beaten the Russell 2000 Growth Index and the small-growth Morningstar Category average by huge margins. It has performed well in a variety of market environments, and occasional rough stretches have never lasted long.

“The people behind the fund instill confidence. Zibelli and co-manager Ash Shah have worked together since 2002, along with Justin Livengood, who is Zibelli’s comanager on Invesco Discovery Mid Cap Growth. Two of the four other analysts have been with this team for roughly 20 years each.

“It’s worth keeping an eye on their workload. In addition to this strategy and Discovery Mid Cap Growth, Zibelli and team also manage large-cap strategies, and in early 2025 they were given control of the US portion of Invesco Global Opportunities as well. Thus far, though, they do not appear to be overburdened.”

—Gregg Wolper