Like a stooped boxer with eyes smacked shut, growth funds still standing after the past year's drubbing have a brutal beauty.
Let's just say it's been a year to forget for growth managers. At one point in 2000 the average growth fund had some 40% of its money in tech stocks. That was great when these highfliers hit frothy valuations and then kept chugging north. But over the past year the tech-laden
Nasdaq Composite is off 40.9% and the average small- and mid-cap growth funds are down 14.8% and 19.8%, respectively, according to
Morningstar.
Doesn't Seem Like Growth, Does It?
Tech-stuffed growth funds have followed their favorite sector south. |
 |
| Source: Morningstar. Annualized returns through April 24. |
If there's anything positive to glean from the past year's pain, it's that it gives you a chance to see which funds might be able to stay afloat in tough times and which might be one-hit wonders. Yesterday we looked at
big-cap growth funds; today the
Big Screen shifts its gaze to the small- and mid-cap growth funds, which comprise 15% to 20% of a diversified portfolio, using the broad
Wilshire 5000 Index as a yardstick.
Just like yesterday, we screened for funds that beat their average peer over the past one-, three- and five-year periods with the same manager, according to Morningstar. To make our cut funds also had to have below-average annual expenses, be open to new investments and have a minimum investment of less than $10,000.
Of the 470 small- and mid-cap growth funds out there, just 14 made the cut. That's how tough the past year has been for growth types. Let's check out the top five in each bin over the past five years and some intriguing also-rans, starting with mid-caps.
Not Middling
Few mid-cap growth funds made our cut;
here are the top five, ranked by five-year gains. |
| Fund | 5-Year Return | 1-Year Return |
| (BRAGX)Bridgeway Aggressive Growth | 29.2% | 2.9% |
| (ALMRX)Alger MidCap Growth | 21.1 | -1.4 |
| (VALSX)Value Line Special Situations | 16.6 | -16.3 |
| (SSMGX)Sit Small Cap Growth | 15.9 | -13.3 |
| (RSMOX)RS MidCap Opportunities | 15.1 | -10.4 |
| Avg. Mid-Cap Growth fund | 10.5 | -19.8 |
| Source: Morningstar. Annualized returns through April 24. |
A couple of the no-load funds on this list were also on a list of
my favorite growth funds: The
(BRAGX)Bridgeway Aggressive Growthfund and the
(RSMOX)RS MidCap Opportunitiesfund. Both got there by strictly following disciplined strategies that have consistently kept them ahead of the pack.
John Montgomery, manager of the Bridgeway fund since its 1994 launch, uses four different quantitative models to unearth companies of all flavors whose earnings growth might not be reflected in the stock price. Sounds a bit dry, but his track record is exciting. The fund's 29.2% five-year annualized return beats 99% of its peers' and dusts the S&P 500 by more than 14 percentage points. Montgomery has topped his average peer in each of the past six years.
Despite these attributes, it's not for you if you want a pure mid-cap fund. It ends up with a mid-cap label because it essentially splits the lion share of its money between small- and large-caps, averaging out as a mid-cap fund.
Purists might be more interested in the RS MidCap Opportunities fund, where manager John Wallace has typically kept most of the fund's money in mid-cap stocks, typically defined as having a market capitalization between $1.5 billion and $9 billion.
Wallace focuses on companies with high earnings growth that he thinks can double in value over three years or so. He sets a price target when he buys a stock, typically selling if it falls 15% from the purchase price or hits the target he set.
Purists might also like the moderate and mostly mid-cap approach practiced by Gene Sit, manager of the poorly named
(SSMGX)Sit Small Cap Growth fund since it launched in 1994. Sit, who stopped by for a
10 Questions Interview recently, divides his portfolio between companies with stable earnings growth and highfliers that are growing at a faster clip. That translates to a diversified portfolio and returns that don't end up on top 10 or bottom 10 scoreboards. Sit has topped at least 60% of his competitors over the past one-, three- and five-year periods, according to Morningstar.
Three other mid-cap funds that didn't crack our top five, but were on my favorite growth funds list, might be worth a look too: The
(CVGRX)Calamos Growth fund, the
(FMCSX)Fidelity Mid Cap Stock fund and the
(RPMGX)T. Rowe Price Mid-Cap Growth fund.
| Honorable Mentions |
| Fund | 5-Year Return | 1-Year Return |
| (CVGRX)Calamos Growth | 30.7% | 0.5% |
| (FMCSX)Fidelity Mid Cap Stock | 21.3 | 13.7 |
| (RPMGX)T. Rowe Pirce Mid-Cap Growth | 14.5 | 0.0 |
| Avg. Mid-Cap Growth fund | 10.5 | -19.8 |
| Source: Morningstar. Annualized returns through April 24. |
John Calamos, the fund's lead manager since 1990, uses quantitative screens to sift for companies that may be poised for unanticipated earnings growth. (His son, John Jr., joined him at the helm in 1994.) His combination of stock screening and fundamental analysis has led to a somewhat aggressive, gunslinger style but also heady gains. The fund beats the S&P 500 and 99% of its peers over the past one-, three- and five-year periods, according to Morningstar. The father-son team has beaten the average return of their competitors in each of the past five calendar years.
The other two funds chart a less aggressive course. David Felman has only run the Fidelity Mid Cap Stock fund since 1999, but his price-conscious style helped him ring up a 32% gain that beat nearly all of his peers. He's also not afraid to let cash build up when he isn't finding any opportunities. At the end of last month, for instance, the fund had some 19% of its money in cash, almost four times the category average. Thanks partly to Felman's solid gains last year the fund tops more than 90% of its peers over the past one-, three- and five-year periods.
Brian Berghuis, manager of the T. Rowe Price Mid-Cap Growth fund since it started out in 1992, also tends to avoid pricey stocks. Instead he tends to spread the fund's money broadly among different industry sectors, typically with less emphasis on the tech sector. That hurt him in 1999 when his fund's 23.8% gain trailed 90% of his peers, but he still beats his peers over the one-, three- and five-year periods with less volatility that his competitors over the past three years. Given the past year's carnage, many investors might like the idea of a fund like this that sticks to mid-caps and doesn't take outsize risks.
So much for the mid-caps, now let's check out funds that focus on small fries -- stocks with market caps of $1.5 billion or less.
Nothing Small Here
These funds have gotten big gains from stocks of small companies. |
| Fund | 5-Year Return | 1-Year Return |
| (ACRNX)Liberty Acorn | 16.0% | 16.5% |
| (WAAEX)Wasatch Small Cap Growth | 15.3 | 20.7 |
| (VLSCX)Value Line Emerging Opportunities | 13.8 | -1.6 |
| (BGRFX)Baron Growth | 13.7 | 2.9 |
| (MERDX)Meridian | 12.2 | 13.6 |
| Avg. Small-Cap Growth fund | 8.0 | -14.8 |
| Source: Morningstar. Annualized returns through April 24. |
Three of these funds were on my small-cap faves list: The
(ACRNX)Liberty Acorn fund, the
(WAAEX)Wasatch Small Cap Growth fund and the
(BGRFX)Baron Growth fund.
If there's a theme that runs through this trio it's manager experience. Ralph Wanger has run the Acorn fund since 1970 with Chuck McQuaid joining as co-manager in 1995. The pair find most of their ideas by blending a focus on broad growth trends and individual company analysis. Historically they've had overweightings in the communications and financial sectors and they beat at least 80% of their peers over the past one-, three-, five- and ten-year periods. One negative to keep in mind is that Wanger recently sold his firm and funds to
Liberty Funds, which will convert the no-load fund to a broker-sold fund and could point to a management change down the road.
Jeff Cardon has skippered the no-load Wasatch Small Cap Growth fund since its 1986 launch. You might not recognize the name of the fund or its manager, but both deserve a look. Cardon focuses on stocks of companies that are growing their earnings at a minimum 20% annual clip and that's often led to sizable stakes in the mercurial tech and health care sectors. Despite his taste for that racy fare, he's matched Wanger by beating at least eight in ten competitors over the past one-, three-, five- and ten-year periods.
Since its 1994 inception, Ron Baron has run the fund that bears his name. He charts a distinct course, focusing on companies with solid cash flow and earnings growth, with a big emphasis on management. He's known for insisting on close and regular contact with the people running the companies whose shares are in his funds. That sounds good, but it can also lead to some outsize bets on individual stocks, which is a recipe for volatility. He has topped his peers over the past five years, but it can be a rough ride. In 1998 and 1999, for instance, he finished in the black but lagged his peers two years in a row.
If you're looking for a smoother ride you might consider two other small-cap funds, the no-load
(MGSEX)Managers Special Equity fund and the no-load
(VEXPX)Vanguard Explorer fund.
| Honorable Mentions |
| Fund | 5-Year Return | 1-Year Return |
| (MGSEX)Managers Special Equity | 13.3% | -9.6% |
| (VEXPX)Vanguard Explorer | 10.9 | -0.3 |
| Avg. Small-Cap Growth fund | 8.0 | -14.8 |
| Source: Morningstar. Annualized returns through April 24. |
Both of these funds are run by several different managers, each using a different style. For both funds that has added up to a diversified portfolio and solid if not jaw-dropping gains.
The Managers Special Equity fund has four different small- and micro-cap specialists in charge, using growth and value styles. The fund is broadly diversified with a portfolio of some 350 stocks -- its average peer has about 150 -- so it's not rattled much by individual stock or sector moves.That's worked out pretty well as the fund tops the category average over the past one-, three-, five- and ten-year periods, according to Morningstar.
Similarly, Vanguard has five different managers running its Explorer fund. Owning the fund gives you access to growth, value and indexing strategies and a vast portfolio of more than 800 stocks. The fund won't shoot the lights out when one pricey sector -- like tech -- lords over the market, but it does top at least 70% of its competitors over the past one-, three-, five- and 10-year periods. Along the way it's had less volatility too.
Well, there you have it, a look at the small- and mid-cap growth funds that emerged from tech's meltdown battered but unbowed.
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