3 Top-Performing Small-Blend Funds

The average small-blend fund has struggled in recent months, dropping over 8% in the first quarter. When looking at the long term, however, several funds have kept pace with—or even beaten—the broader market.

To screen for the top-performing funds in this category, we looked for those with the best returns over the last one-, three-, and five-year periods. All names that passed the screen are actively managed.

• Invesco Small Cap Equity Fund SMEFX
• Nuveen Small-Cap Value Opportunities Fund NSCFX
• Virtus KAR Small-Cap Core Fund VSCRX

Small-Blend Funds Performance

Over the last 12 months, small-blend funds have declined 3.42%. On an annualized rate, they have returned 2.00% over the last three years and 15.32% over the last five. That compares with the Morningstar US Market Index, which has returned 7.35% over the last 12 months, 8.39% per year over the last three years, and 18.21% per year over the last five years.

What Are Small-Blend Funds?

Small-blend portfolios favor US firms at the smaller end of the market capitalization range. Some aim to own an array of value and growth stocks, while others employ a discipline that leads to holdings with valuations and growth rates close to the small-cap averages. Stocks in the bottom 10% of the capitalization of the US equity market are defined as small cap. The blend style is assigned to portfolios where neither growth nor value characteristics predominate.

Screening for the Top-Performing Small-Blend Funds

To find the best small-blend funds, we looked at returns data from the past one, three, and five years, using data available in 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 excluded funds with assets under $100 million and analyst coverage that was not 100%. This left three funds.

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.

Invesco Small Cap Equity Fund

• Morningstar Medalist Rating: Neutral
• Morningstar Rating: ★★★★

Over the past 12 months, the $911.7 million Invesco Small Cap Equity Fund rose 1.70%, while the average fund in its category fell 3.42%. The Invesco fund, launched in September 2012, has climbed 4.21% over the past three years and 17.32% over the past five.

“The team’s approach has some attractive traits as well as some limitations. The team invests in roughly 180 unique stocks across its two strategies, which limits the depth of the small team’s research. The team also churns through a good number of stocks; more than half of the portfolio’s holdings were added in the prior 18 months as of September 2024. Interestingly, rather than sizing initial positions based on conviction, the team generally initiates each at approximately 1% of assets. Then, instead of adding to positions when prices decline, it often sells and then rotates into new investments while also allowing successful picks to grow into mid-cap holdings, effectively a momentum approach where market movements guide position sizes.” - Andrew Redden, analyst

Nuveen Small-Cap Value Opportunities Fund

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

Over the past 12 months, the $224.3 million Nuveen Small-Cap Value Opportunities Fund rose 5.32%, while the average fund in its category fell 3.42%. The Nuveen fund, launched in February 2013, has climbed 8.40% over the past three years and 19.50% over the past five.

“Comanagers Andy Hwang and Tom Lavia are off to a promising start after taking over this strategy (formerly Nuveen NWQ Small-Cap Value) from longtime manager Phyllis Thomas in July 2019. The duo has plenty of industry experience, but this is their first time running a portfolio. In addition, workload questions linger. The managers serve as analysts on Nuveen’s value equity team, and they also run sibling strategy Nuveen Small/Mid Cap Value NSMRX. Lavia also serves as a comanager on a global sustainability strategy.” - Tony Thorn, analyst

Virtus KAR Small-Cap Core Fund

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

The $2.1 billion fund has climbed 0.07% over the past 12 months, outperforming the average fund in its category, which fell 3.42%. The Virtus fund, launched in November 2014, has climbed 12.07% over the past three years and 17.71% over the past five.

“The team applies a patient approach centered on quality and conviction. They look for attractively valued small-cap companies whose competitive advantages help generate and maintain strong returns on capital. They want companies with competitive edges in the form of cost advantages, customer stickiness, network effects, or a degree of market control. When the managers find one of these companies, they invest for the long term and with conviction; they build a concentrated portfolio of 25-30 stocks of their top ideas, and annual portfolio turnover tends to be less than 20%. Aside from a limit of 10% of assets in a single stock, the portfolio is loosely constrained; it has no limits on sector weightings, for example, allowing for a 49.3% weighting in industrials in June 2024.” - Tony Thorn