If you don't own a small- or mid-cap value fund, this year shows you why it's a bad idea to ignore these wallflowers.
These funds comprise some 15% of a diversified portfolio using the
Wilshire 5000 as a yardstick, but like a backup singer who steals the show, they're the two top-performing stock-fund categories so far this year. If you're not familiar with them, let's look at how these funds invest, how they've performed over the long-term and then sift out some solid performers from their somewhat thin ranks.
As you might surmise from the name, these funds essentially hunt for bargains among the stock market's small fry. The median market capitalizations of small- and mid-cap value funds' portfolios are $1.1 billion and $7.9 billion, respectively, compared to $66.9 billion for the
(VFINX Quote)Vanguard 500 Index fund, which tracks the
S&P 500. They typically focus on companies with decent earnings growth and a cheap valuation relative to their peers, the broader market or some combination of the two.
That cheapskate approach leads to a light weighting in pricey sectors like technology, where these funds have about 10% of their money, or about half that of the
S&P 500. While this put these funds at the back of the pack during tech's bonny run the in the 1990s, it helped them weather the tech-laden
Nasdaq Composite's continuing meltdown far better than more aggressive types.
Smaller Values, Bigger Returns
In the past year, small-cap and mid-cap
value funds have been a sweet spot |
 |
| Source: Morningstar. Annualized performance figures through Mar. 2. |
The vast majority of investor dollars have gone to growth funds in recent years, so it's a safe bet that plenty of investors are or should be looking at these funds to diversify a growth-heavy portfolio. If you're in that boat, the Big Screen is here for you.
We combed through these categories, looking for funds that beat their average peer in the last one- and three-year periods, according to
Morningstar. Then we yanked out funds where the managers hadn't been in place for at least three years, as well as those with above-average annual expenses and steep investment minimums. In each case we cobbled together a top-10 list, ranked by the funds' three-year annualized gains.
Let's look at small-cap value funds first, then mid-caps, shall we?
| Leading Small-Cap Value Funds |
| Fund | 3-Year Annualized | 1-Year Return |
| (RYLPX Quote)Royce Low-Priced Stock | 18.5% | 29.5% |
| (SSRAX Quote)State St. Research Aurora | 15.7 | 30.1 |
| (PENNX Quote)Pennsylvania Mutual Inv | 9.3 | 22.9 |
| (RYTRX Quote)Royce Total Return | 8.8 | 28.5 |
| (WBVDX Quote)William Blair Value Discovery | 8.5 | 22.4 |
| (FLPSX Quote)Fidelity Low Priced Stock | 8.1 | 24.0 |
| (SVFAX Quote)MSDW Special Value A | 7.8 | 34.8 |
| (FAMVX Quote)FAM Value | 6.1 | 41.2 |
| (QUSVX Quote)Quaker Small Cap Value | 5.7 | 30.0 |
| (FRBSX Quote)Franklin Balance Sheet Inv | 5.4 | 27.4 |
| Avg. Small-Cap Value Fund | 3.5 | 21.9 |
| S&P 500 | 7.0 | -9.6 |
| Source: Morningstar. Annualized performance figures through Mar. 2. |
Whitney George runs chart-topper
(RYLPX Quote)Royce Low-Priced stock and co-manages the
(RYTRX Quote)Royce Total Return fund with firm
jefe Charles Royce. Both no-load funds follow slightly different versions of the firm's strategy -- look for companies that generate a lot of cash, have a healthy balance sheet and a cheap stock price. The Low-Priced stock fund focuses on shares trading at $15 or less, while the Total Return fund typically leans toward companies that pay a dividend.
The approach might sound vanilla, but the funds' returns are not. Each beat about 70% of their peers over the past one-, three- and five-year periods, according to Morningstar.
Rudy Kleiber, manager of the broker-sold
(SSRAX Quote)State Street Research Aurora fund, also focuses on companies with low stock prices relative to their cash flow. He looks for companies with a catalyst that he hopes will trigger interest on Wall Street, like a promising new product, business strategy or management team.
In addition to trouncing his peers over the past one- and three-year periods, the fund's 28.3% five-year annualized gain beats some 98% of its competitors and dusts the S&P 500 by almost 13 percentage points.
Maybe the most impressive portfolio manager on the list is Joel Tillinghast, manager of the
(FLPSX Quote)Fidelity Low Priced Stock fund since its 1989 inception. Despite the fund's girth -- it has $6.4 billion in its coffers compared to about $250 million for its average peer -- the manager has still been able to keep up with more nimble competitors.
The fund has some 748 stocks and doesn't do much trading, but his choices have worked out. The fund's 18.2% 10-year annualized gain beats just about all its peers. That said, the fund's more recent returns are understandably tamer due to its size and that might be good reason to admire this fund from afar.
One high-profile, solid fund that didn't make our cut is the no-load
(TAVFX Quote)Third Avenue Value fund where Marty Whitman has held the reins since the fund's 1990 inception. He follows a strict approach, looking for situations where he believes a company's stock is trading for up to 50% less than what he thinks is its true value. Interestingly, the fund has almost 30% of its money in tech stocks, but beat at least 80% of its peers over the last three-, five- and 10-year periods.
Why isn't it on our list? Well, that tech weighting appears to be hurting the fund recently. Its 6.9% gain over the last 12 months lags more than 80% of its peers. Still, if you don't mind a value fund that owns some tech stocks, this one is worth a look.
Now, lets look at those mid-cap value funds.
| Leading Mid-Cap Value Funds |
| Fund | 3-Year Annualized | 1-Year Return |
| (DMCVX Quote)Dreyfus Mid Cap Value | 18.4% | 51.9% |
| (MMVIX Quote)Mercury HW Mid Cap Value | 18.4% | 51.9% |
| (MMVIX Quote)Mercury HW Mid Cap Value | 15.8 | 60.9 |
| (ACSTX Quote)Van Kampen Comstock A | 15.2 | 50.9 |
| (LAVLX Quote)Lord Abbett Mid Cap Value | 14.6 | 56.2 |
| UAM C&B Mid Cap Equity Inv | 14.2 | 60.7 |
| (COIGX Quote)SG Cowen Income+Growth A | 10.3 | 53.3 |
| (LLPFX Quote)Longleaf Partners | 9.9 | 42.6 |
| (TWEIX Quote)American Century Equity I | 9.7 | 35.3 |
| (MRVEX Quote)Marshall Mid Cap Value Inv | 9.6 | 42.2 |
| (FMIEX Quote)1st Source Monogram Income | 9.5 | 28.6 |
| Avg. Mid-Cap Value Fund | 7.2 | 26.0 |
| S&P 500 | 7.0 | -9.6 |
| Source: Morningstar. Annualized performance figures through Mar. 2. |
At the top, we've got the no-load
(DMCVX Quote)Dreyfus Mid Cap Value fund, where Peter Higgins has called the shorts since the fund's 1995 inception. He looks for companies that he thinks have that magic combination of a cheap stock price and a catalyst for growth. A lot of managers do the same, but he's had more success than most. The fund beats at least 90% of its peers over the past one-, three- and five-year periods. In fact, its 24.7% five-year annualized gain tops all of its competitors.
Another intriguing choice is the broker-sold
(ACSTX Quote)Van Kampen Comstock fund, particularly if you've got an interest in the utilities sector. Robert Baker has been the fund's lead manager since 1994 and his search for battered stocks with unperceived value often leads him to utilities. The fund's 15% stake in that sector might not sound like much, but it's more than five times its weighting in the S&P 500, according to Morningstar.
That bent has led to solid results. The fund beat at least 85% of its competitors over the last one-, three- and five-year periods.
The no-load
(LLPFX Quote)Longleaf Partners fund also charts a distinct course. Managers Mason Hawkins, Staley Cates and John Buford typically hold just 20 to 25 stocks, but this is the inverse of high-octane concentrated funds like
(JAVLX Quote)Janus Twenty. Instead of buying the pricey stocks of the fastest-growing companies in Silicon Valley, these managers focus strictly on stocks of unloved companies they think are trading at least 40% below true value.
The approach might be a bit racy, but so are its results. The fund beats at least 70% of its peers over the last one-, three-, five- and 10-year periods.
Two solid mid-cap value funds that didn't make our cut are the no-load
(OAKLX Quote)Oakmark Select and
(WVALX Quote)Weitz Value funds.
Bill Nygren has proven himself to be one of the best value managers out there in running Oakmark Select, where he usually only holds 15 or 20 stocks. Like his colleagues at Chicago-based
Harris Associates, he picks stocks from a firm-wide buy list. His picks are eclectic, the fund's top-two holdings are insurer
Washington Mutual (WM Quote) and toy story
Toys R Us(TOY Quote), and his track record is enviable.
The fund's 22.1% three-year annualized gain tops just about all of its peers and even in 1999's tech-led market he managed to gain 14.5%, beating more than three-quarters of his peers. It appears the fund missed our cut because Henry Berghoef's promotion to co-manager last year left the fund with a one-year manager tenure in Morningstar's database, proving the importance of looking beyond a fund's statistics.
Since 1986 Wally Weitz has run his eponymous fund with a taste for telecommunications, media and cable stocks, where about half the fund's assets are invested. He beats at least 70% of his peers over the past one-, three-, five- and 10-year periods, according to Morningstar. He only missed the cut because of the fund's steep $25,000 investment minimum. That said, it's available with just a $2,500 minimum via leading online broker
Charles Schwab's Web site.
There you have it: a look at some of the gems among this year's unlikely leading fund flavors.
