This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Microcap Funds That Rocket During Rallies

NEW YORK (TheStreet) -- Microcap stocks have lagged recently. During the past five years, iShares Russell Microcap Index ETF (IWC) has lost 1% of its value annually, trailing the S&P 500 Index by 3.6 percentage points.

Most of the poor performance can be traced to big losses that microcaps suffered during the recession. As the financial crisis began unfolding in the second half of 2007, tiny stocks were among the first to sink, and they dropped sharply throughout the market downturn of 2008.

While the definition of microcaps varies, many portfolio managers say that the group includes companies with market capitalizations of less than $500 million. In contrast, the average market value of stocks in the S&P 500 is $48 billion.

It is not unusual for microcaps to underperform in downturns. The tiny companies tend to be more volatile and less well-run than the blue chips. Microcaps often face big debt burdens. As a result, the group records more than its share of bankruptcies. When investors began fleeing risk during the recent market downturn, they dumped microcaps. Hedge funds that had to raise cash were among the big sellers.

Should you avoid microcap funds? Not necessarily. While microcaps are prone to big downturns and long periods of subpar performance, the stocks tend to compensate by excelling in bull markets and outperforming over the long term. During the past 85 years, microcaps have returned 12.3% annually, compared to 9.4% for large stocks, according to the University of Chicago's Center for Research in Security Prices. The data suggest that investors who want to use a microcap fund should be prepared to wait patiently through downturns and what could be prolonged periods of underperformance.

To own a fund that can knock the cover off the ball in a bull market, consider Wasatch Micro Cap Value (WAMVX), which has returned 5.3% annually during the past five years. After crashing in the downturn, the fund gained 70% in 2009, outpacing the S&P 500 by 43 percentage points for the year.

Portfolio manager Brian Bythrow is an opportunist, holding a mix of growth and value names. He classifies some of his holdings as fallen angels, growth stocks that have slipped because of temporary problems. Other favorites are value-priced stocks that are beginning to enter a growth phase. Bythrow prefers companies that move under the radar. Many holdings have little or no coverage by analysts.

1 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,098.45 +18.88 0.11%
S&P 500 2,003.37 +6.63 0.33%
NASDAQ 4,580.2710 +22.5760 0.50%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs