3 Great Funds for Contrarians in 2024

Susan Dziubinski: As 2023 winds down, some investors may be looking for ideas to invest in for 2024. Here at Morningstar, we think investors should build diversified portfolios driven by time horizons, not by the turn of the calendar from one year to the next. But we’re also aware that investors may have some dollars set aside in their portfolios for taking a flier, assuming some risk, and dare we say it, having some fun.

Today, we’re sharing highly rated funds that investors might consider if they’d like to invest a few dollars in one particular out-of-favor part of the market: small-cap stocks. Small-cap stocks have taken it on the chin in 2023. In fact, the Morningstar US Small Cap Index has lagged the Morningstar US Large Cap Index by 18 full percentage points this year through mid-November. Contrarians might therefore be interested in using some of their “fun money” to add a small dose of small-cap stocks to their portfolios.

3 Great Funds for Contrarians in 2024

1. Brown Company Management Small Company BCSIX

2. Diamond Hill Small Cap DHSIX

3. Vanguard Small Cap Index VSCIX

Investors looking to invest in small-cap growth stocks might consider Brown Company Management Small Company. This fund earns our top Morningstar Medalist Rating of Gold. The fund reopened to new investors earlier this year. The management team here defines small companies by operating revenue, not market capitalization. They want companies with reliable growth prospects that sell products or services that save time, lives, money, or headaches. They’re patient investors, too, and are willing to hold on to names during choppy markets. The portfolio’s current positioning leans heavily toward growth, even more so than the average fund in the small-growth category. The most recent portfolio includes fewer than 40 stocks, with nearly half of the fund’s assets held in its top 10 names.

Investors who’d rather invest in small-cap value stocks might take a look at Diamond Hill Small Cap. Its various share classes earn Silver and Bronze Morningstar Medalist Ratings. The managers here follow what’s called a fundamental intrinsic value approach. They buy companies when their stock prices are lower than the worth of the underlying businesses, and they sell the stocks of these companies when they reach their full intrinsic values. The team typically owns a given stock for three to five years. They prefer companies with stable cash flows and defensible competitive advantages. The most recent portfolio includes about 50 stocks and skews a bit smaller and more toward the blend portion of the Morningstar Style Box than other funds in the small-value category.

And for those investors who’d like exposure to both small-cap value and small-cap growth stocks in one place, take a look at Vanguard Small Cap Index VSCIX, which is also available as an ETF. The least expensive share classes and the ETF earn our top Morningstar Medalist Rating of Gold. Unlike the other two funds we talked about today, this Vanguard fund is an index fund that tracks the CRSP US Small Cap Index. The portfolio is market-cap-weighted and looks a lot like the average small-cap blend fund. However, the fund’s ultralow expenses have given it a performance advantage over time.

Morningstar director Dan Culloton, associate director Tony Thomas, and associate analyst Zachary Evens provided the research behind this segment.

Watch “2 Warren Buffett Stocks to Sell” for more from Susan Dziubinski.