Small Value Funds Sail Along

NEW YORK (TheStreet) -- Small-value funds have been sailing ahead this year, returning 13.5% and outpacing the S&P 500 by 6 percentage points, according to Morningstar.

Can small value continue winning? Richard Bernstein, portfolio manager of Eaton Vance Richard Bernstein Multi-Market Equity Strategy Fund(ERBAX), believes it can. He says that small value should lead the markets for the next decade, outpacing Chinese stocks and other hot segments.

While the Eaton Vance fund is new, Bernstein is no novice. For two decades, he served as an investment strategist for Merrill Lynch, gaining attention by making a series of dead-on market calls.

Bernstein jokingly attributes his success to an investment philosophy that resembles the techniques of a Mafia loan shark that seeks out the most desperate clients and charges them high rates. In a similar fashion, investors can get the highest returns by finding unloved sectors that face shortages of capital.

In the late 1990s, Bernstein made one of his most notable recommendations, urging investors to avoid hot Internet stocks and focus on ice-cold commodity and energy companies.

At the time, investors were racing to buy technology stocks, while venture capitalists competed to fund start-ups. Meanwhile, natural resources stocks languished. Companies could not raise capital to build new refineries and mines.

Bernstein's forecast proved on the mark. During the past decade natural resources funds have returned 12.6% annually, while technology funds have lost 6.6%.