The Big Screen: Small-Cap Growth Funds That Are Light on Risk

Small-cap growth funds are known for big gains and volatility -- but some funds offer more of the former and less of the latter.

Today the Big Screen is going to hunt for those funds, but first let's look at what stocks these funds buy and how they've performed.

Screen Gems

Mid-Cap Growth Funds, Without the Volatility

Big-Cap Growth Funds, With Less Risk

"Safer" Tech Funds

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Small-cap funds typically focus on stocks with market caps below $1.5 billion, looking for stock in companies increasing earnings faster than their peers. Paying sometimes-steep prices for these kinds of stocks is always a bit risk, since they're often punished most harshly in selloffs. That risk is even higher with small-caps, because they're often young companies relying on fewer products and clients than bigger, more established competitors.

Then again, as fund marketers say, titans like Microsoft(MSFT Quote) and Cisco Systems(CSCO Quote) were both small-cap stocks once and investors who bought them early on made oceans of money. Small-cap stock funds tend to perform in bursts -- they gained more than 60% on average in 1999 -- but they've underperformed the S&P 500 over the past 10 years, according to Morningstar.

Trailers Small-cap growth funds, on average, have trailed the broader market.
	Avg. Small Cap Growth	S&P 500
YTD Return	-8.1%	-1.5%
1-Year Return	-9.3	-8.7
5-Year Return	14.2	18.2
10-Year Return	17.1	18
Source: Morningstar. Annualized performance figures through Jan. 10.

Still, a diversified portfolio would have some 10% of its assets in small-cap stocks, using the Wilshire 5000 Total Stock Market Index as a yardstick. If you're a small-cap bull or if you've ignored the category until now, we've gone fishing for some solid funds you might consider.

We screened the 216-fund category for funds that beat their average peer over the past one-, three- and five-year periods, while also falling less than their average peers in down months over the past three years. Finally, to make our list, funds also had to be open to new investors -- small-cap funds routinely shutter because a fat asset base in the billions of dollars can slow down a fund in the less-liquid small-cap market.

Here's a top 10 funds that made the cut, ranked by one-year returns.

Leading Small-Cap Growth Funds
Fund	1-Year Return	3-Year Annualized	5-Year Annualized
(SAGWX Quote)Sentinel Small Company A	34.5%	19.4%	19.4%
(MERDX Quote)Meridian	27.1	15.1	14.8
(TEGAX Quote)Touchstone Emerging Growth A	24.8	23	21.6
(WAMCX Quote)Wasatch Ultra Growth	22	23.3	14.5
(WAAEX Quote)Wasatch Small Cap Growth	17.1	21.5	18.2
(BCSIX Quote)Brown Capital Management Small Co Instl	14.6	25.4	21.7
(ACRNX Quote)Liberty Acorn	8.2	15.8	18.1
(VEXPX Quote)Vanguard Explorer	7.7	16.5	15
(VLSCX Quote)Value Line Emerging Opportunities	2	23.2	17.8
(NPFGX Quote)Navellier Aggressive Growth	-0.3	17.6	17.3
Avg. Small Cap Growth fund	-9.3	13.1	14.2
S&P 500	-8.7	13.1	18.2
Source: Morningstar. Annualized performance figures through Jan. 10.

In running the chart-topping, broker-sold (SAGWX Quote)Sentinel Small Company fund, co-managers Scott Brayman and Robert Lee spread the fund's money across a broad range of industry sectors with solid results. The fund, which has about $200 million in its coffers, beats at least 75% of its peers over the past one-, three- and five-year periods, according to Morningstar.

Salt Lake City-based Wasatch Funds cracked the top 10 twice with no-load funds that like health care and tech stocks in a big way, the $55 million (WAMCX Quote)Wasatch Ultra Growth fund and the $240 million (WAAEX Quote)Wasatch Small Cap Growth fund.

Ultra Growth, co-managed by Karey Baker and Ajay Krishnan, and the Small Cap Growth, run by Jeff Cardon, both had more than half their assets in tech at the end of the third quarter, the funds' most recent portfolio report. Despite that aggressive focus, both funds have beaten their peers over the past one-, three- and five-year periods, while also enduring less volatility than their average peer over the past three years, according to Morningstar.

If you're looking for a more diversified small-cap fund, you might check out no-load (VEXPX Quote)Vanguard Explorer, which spreads its large $4.1 billion asset base among five managers from five companies. Vanguard index guru Gus Sauter employs a growthy index style and the fund's four outside managers pick stocks they think are poised to rise.

All these managers spread the fund's assets among some 900 stocks and that diversification has undercut volatility, without hurting the fund's returns. The fund beats its average peer over the past one-, three-, five- and 10-year periods and its 0.74% expense ratio is well below the 1.67% category average. Its 18% 10-year annualized return beats the S&P 500 and more than 60% of the fund's competitors.

Another multimanager fund you might consider is the no-load (MGSEX Quote)Managers Special Equity fund, which has four subadvisers using either growth or value investment styles: PBHG Funds, Westport Asset Management, Liberty Investment Management and Kern Capital Management.

The $2.1 billion fund barely missed our cut, because its 3.2% loss over the past year didn't rank in our top 10, but it does beat both its average peer and the S&P 500 over one-, three-, five- and 10-year periods. The fund's 20.1% 10-year annualized gain beats the S&P 500 by more than 2%, as well as 85% of its peers.

If you're curious about what stocks helped these leading funds beat their peers, look no further. We lumped the funds on our list together and singled out their cumulative top-10 holdings. Since the small-cap market is big, there isn't much consensus, and since these are small companies, you won't find many household names on this list.

Under the Hood Stocks with the biggest weighting in the combined portfolios of the top funds.
Stock	Weighting in Top-10 Funds	Number of Top-10 Funds Owning the Stock
Orthodontic Centers of America(OCA Quote)	0.9%	4
Techne(TECH Quote)	0.8	4
Micrel(MCRL Quote)	0.8	3
Peregrine Systems(PRGN Quote)	0.8	4
AmeriPath(PATH Quote)	0.8	3
Express Scripts(ESRX Quote)	0.7	2
Amsurg A(AMSGA Quote)	0.7	3
Devon Energy(DVN Quote)	0.7	3
ICU Medical(ICUI Quote)	0.7	3
Pericom Semiconductor(PSEM Quote)	0.7	3
Source: Morningstar. Holdings as of funds' most recent portfolio reports.