In Search of Small-Cap Growth Funds With Big Returns, Small Expenses

There are more than 220 small-cap growth funds to choose from, so you might as well focus on finding one with big returns and modest expenses.

Screen Gems: High Returns, Low Fees

Mid-Cap Growth Funds

Large-Cap Growth Funds

Tech Funds

Over the years, growth investors haven't cared much about a fund's expenses. The average small-cap growth fund rang up a 61% gain in 1999, so even miserly types probably worried precious little about whether their fund's expense ratio was higher or lower than the category's 1.66% average. After many small-cap growth funds finished last year in the red, however, funds' costs are looking a lot more relevant.

Big Growth in Small Packages? Small-cap growth funds have, on average, trailed the broader market during the past decade

Source: Morningstar. Returns through Jan. 24.

Of course, the truth is that fund costs are always important because high fees can chip away at a fund's gains or deepen its losses. Fees alone aren't a reason to buy or sell a fund, but even seemingly negligible percentage points can add up over time. For example, you might not see much difference between a fund with a 1% expense ratio and a fund with a 2% expense ratio. But if you invest $10,000 in each fund and they both gain 8% annually, that extra 1% toll will shave $7,000 off your return over the next 20 years, according to a report on mutual fund fees published by Congress' General Accounting Office last year.

So today the Big Screen continues its quest to unearth funds that have given investors more for their money, namely above-average gains with below-average expenses. We sifted small-cap growth funds, typically 10% to 15% of a diversified stock portfolio, for funds that beat their average peer over the past one- and three-year periods according to Morningstar. Then we yanked out funds that levy sales charges or loads, and funds that have expense ratios above the category's 1.66% average. Finally, we pulled out funds that have high minimum investments or are closed to new investors -- a big asset base often slows down small-cap funds, forcing them to shutter.

Here are the top 15 funds that made our cut, ranked by their three-year annualized returns.

Leading and Cheap Small-Cap Growth Funds These funds have beaten their peers and kept costs down
Fund	3-Year Annualized Return	1-Year Return
(REGAX)Reserve Small-Cap Growth	45.1	1.6
(RKGRX)Rockland Small Cap Growth	39.3	-1.9
(BNSIX)BNY Small Cap Growth	29.7	2.9
(WAAEX)Wasatch Small Cap Growth	24.1	33.2
(RESCX)HSBC Investor Small Cap	23.8	16.3
(VLSCX)Value Line Emerging Opportunities	23.7	4.9
(CMSCX)Columbia Small Cap	22.7	4.0
(FTSCX)FTI Small Capitalization	21.4	-0.7
(PSSCX)PBHG Strategic Small Company	21.2	14.3
(BTSCX)Deutsche Small Cap	20.1	14.5
(VEXPX)Vanguard Explorer	18.4	12.8
(NPFGX)Navellier Aggressive Growth	17.2	3.2
(MGSEX)Managers Special Equity	17.1	1.8
(ACRNX)Liberty Acorn	17.0	13.6
(MERDX)Meridian	15.9	38.9
Avg. Small-Cap Growth fund	15.4	-3.5
Source: Morningstar. Performance figures through Jan. 29.

You might not have heard of chart-topper (REGAX)Reserve Small-Cap Growth fund, which carries a 1.55% expense ratio. It might be worth a look if you're an aggressive, tech-hungry type. Managers Edwin Vroom, Brian O'Connor and Adele Weisman have run the fund since its 1994 inception and they aren't afraid to make big bets on sectors and individual stocks. In the middle of last year they had more than 80% of their fund in the tech and telecom sectors, compared with 56% for its average peer, according to Morningstar. At the end of the year, the fund had 48 holdings, compared with 148 for its average peer.

While this racy approach has led to volatility -- the fund lagged 97% of its peers in 1996 and 1997 -- it has also led to solid returns. The fund's 26.5% annualized gain over the past five years beats the S&P 500 by more than seven percentage points, and beats 95% of the fund's peers.

There are less racy funds on our list that are worth a look, too. (WAAEX)Wasatch Small Cap Growth, run by Jeff Cardon since its 1986 inception, is one example. Cardon spreads the funds money more broadly among industry sectors and the approach has led to steady returns. For instance, the average small-cap growth fund had two down years in the 1990s, but Cardon's fund, which has a 1.44% expense ratio, stayed above water each year. The fund's 19.6% 10-year annualized return beats the S&P 500 by more than two percentage points, and beats more than 75% of the fund's peers.

Another lower-octane fund you might consider is the (ACRNX)Liberty Acorn fund, where Ralph Wanger has held the reins since the fund's 1970 inception. Co-manager Charles McQuaid joined him in 1995. The pair follows a price-sensitive, diversified approach, spreading the fund's assets among more than 200 stocks. The fund's expenses are just 0.85% and its 20.5% 10-year annualized return beats the S&P 500 and 90% of its peers, according to Morningstar.

Although Wanger recently sold his fund shop to Liberty, both he and McQuaid have signed contracts to remain on board for at least five years.

Of course, cheapskates will be drawn to the (VEXPX)Vanguard Explorer fund for its tiny 0.74% expense ratio. The fund's performance has been above average but not a knockout. The fund blends indexing with active management. Its 16.8% annualized return over the past five years lags the S&P 500 by two percentage points and is roughly even with its average peer.

A fund that offers you access to several different management styles is the (MGSEX)Managers Special Equity fund, which has a 1.31% expense ratio. The fund divides its assets among four different asset management shops. Each practices a different strategy, so the fund gives investors access to micro-caps, small-caps and mid-caps in both growth and value styles. The fund's 20.1% 10-year annualized gain beats the S&P 500 by more than two percentage points, and beats 85% of its peers.

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