These Small-Cap Funds Have Seen a Torrent of Outflows

A large wave of redemptions can be a challenge for fund managers, but the pain is particularly acute among those who invest in less-liquid stocks. Let’s take a closer look at funds that have lost a high percentage of their assets to net outflows over the past year.

Brown Capital Management Small Company BCSIX stashes most of its assets in technology and healthcare firms; those sectors recently made up 94% of its equity portfolio, more than double the 44% small-growth Morningstar Category average. And it often holds fewer than 40 stocks. So, performance can diverge dramatically from the norm. Indeed, the fund lagged 90% of category peers in both 2021 and 2022 and looked similarly bad in 2024 through November. As a result, investors have pulled a net $2.3 billion over the past 12 months from what was a $3.3 billion asset base—70% of assets were lost to redemptions. The team usually hangs on to its picks for many years, so the strategy doesn’t require a lot of liquidity, and there are no signs of issues, such as a more top-heavy portfolio or a sharply declining cash stake. But this situation bears watching.

Defensive positioning in financially stable firms is a hallmark of Janus Henderson Small Cap Value JSCVX, which has a Morningstar Medalist Rating of Bronze. Thus, it often lags in rallies, as was the case in 2020 and 2021 (the fund lagged more than 90% of small-value peers in both years) and in 2023 when the fund trailed 75% of peers. That string of poor showings has led to substantial outflows. Investors pulled a net $1.2 billion, or 52% of assets, from what had been a $2.3 billion fund in the 12 months through November 2024. Fortunately, the fund’s portfolio is diversified; individual holdings rarely constitute more than 3% of assets. The managers tend to hold stocks for an average of three years, so they’re not trading frequently. But the fund does hold more micro-cap stocks, which are often thinly traded, than its typical peer.

Alger Small Cap Focus AOFAX has struggled mightily of late. The Bronze-rated fund was on a hot streak after manager Amy Zhang took over in 2015, as her preference for fast-growing firms meshed well with the market environment of much of the ensuing six years. But as interest rates rose, such firms had a harder time driving growth upward. As a result, the fund lagged more than 85% of its small-growth peers in 2021, 2022, and 2023, and 55% in 2024 through November. Meanwhile, investors pulled nearly $680 million, or 43% of the assets, in the past year from the then-$1.6 billion fund. Some of the fund’s fast-growers have small market caps, and Zhang will move on quickly at times—half the fund’s holdings were switched out over the past year—so these outflows could present a challenge. That said, portfolio concentration hasn’t increased, and the fund’s cash stake is just a percentage point lower now.

Performance at Goldman Sachs Small Cap Value GSSMX can wax and wane based on style factors. The fund resides in the small-blend category but has as much in common with small-value funds. It struggled on a relative basis in three of the previous five calendar years and is again trailing in 2024. Couple that with the recent retirement of longtime comanager Sally Pope Davis, and it’s not surprising that the fund has seen more than $600 million in net outflows (41% of assets) over the past year from an asset base that then stood at $1.46 billion. This fund is broadly diversified—it recently held more than 180 stocks—and is run in distinct sleeves by different managers, with some oversight from the leader. It’s not surprising that liquidity issues are not apparent.

This article first appeared in the November 2024 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor by visiting this website.