Small-cap value funds' tech-light ways are making them look like the fund world's princes, but let's avoid those that are really frogs at heart.
'Brutal' Losses Tarnish the Stock Fund Strategy
The Big Screen: Bond Funds That Can Keep You Afloat
I Own What?! Bond Funds That Have a Taste for Stocks
10 Questions With Dividend Devotee John Snyder
To that end, if you're in the market for one of these funds, we suggest you check out the category's heavyweight champ, the $10.2 billion
Fidelity Low-Priced Stock fund, which we're inducting into our Ima Winner Fund Club. And you might want to pass on the sputtering $614 million
Prudential Small Company fund, which has the dubious honor of joining our Ima Loser Fund Club.
Small-cap value funds fish for bargains in the ocean of obscure small-cap companies, rarely earning headlines or heavy inflows. But that's not the case this year. Their price-conscious ways have helped them weather the past 18 months' storm pretty well and draw a river of cash. On average, they're the only diversified fund category to be in the black over the past 12 months; they top all diversified fund types over the past three years with an 11% annualized gain.
In light of their newfound popularity, let's check out our winner, then our sinner.
Joel Tillinghast runs a massive fund, but he deserves every dollar.
Large-Cap Value: Dodge & Cox Stock
Large-Cap Growth: Growth Fund of America
Mid-Cap Growth: Bridgeway Aggressive Growth
Mid-Cap Value: Oakmark
Small-Cap Growth: Managers Special Equity
Tech: Dresdner RCM Global Technology
In the rather illiquid small-cap world, it's tough to stay nimble once a fund's assets grow past $1.5 billion. But Tillinghast, who has run the Low-Priced Stock fund since its 1989 inception, manages more than $10 billion without looking winded, next to leaner peers that control about $250 million. Spreading that mountain of money among some 750 stocks, compared to 200 for his average competitor, and sticking with a price-conscious approach, he's managed to post consistently above-average gains with below-average volatility.
The fund has beaten the
and at least 70% of small-cap value funds over the past one, three, five and 10 years, according to Chicago fund tracker Morningstar. There have been few bumps along the way too. Since its 0.1% loss in 1990, when its average peer fell more than 13%, the fund hasn't had a down year.
Source: Morningstar. Returns through Sept. 17.
While the fund does levy a maximum 3% sales charge, the toll is worth it. In addition to its enviable performance, a low-turnover style has helped avoid booking big gains and paying out fat taxable distributions. The fund is more tax-efficient than 92% of its peers over the past 10 years, according to Morningstar. Its 0.8% annual expense ratio is also well below the category's 1.48% average.
There are two concerns: Can another manager adhere to this style if Tillinghast retires? And will the fund close soon since it shuttered in 1998 when its assets were around their current level? After all, high sales have inflated its cash stake to 17% of assets.
Two weeks ago Fidelity expert Jim Lowell
said Tillinghast isn't leaving anytime soon, but when the fund might close is anyone's guess.
The Prudential Small Company fund is in new hands, but it's still a shaky choice at best.
Large-Cap Value: Seligman Common Stock
Large-Cap Growth: Putnam New Opportunities
Mid-Cap Growth: Putnam OTC & Emerging Growth
Mid-Cap Value: Alliance
Small-Cap Growth: Alliance Quasar
Tech: T. Rowe Price Science & Technology
John Mullman of Jennison Associates, the broker-sold fund's fourth manager since 1990, took over about 14 months ago. He switched the portfolio's focus from stocks that looked profoundly cheap to a broader approach, including some more expensive stocks. So far it hasn't worked well, adding another chapter of woe for this fund's shareholders.
Since cheap small-cap stocks have held up well in a tough market, the fund's 11.8% loss over the past year beats the S&P 500 by more than 16 percentage points. While that might sound pretty good, a closer look shows this fund's deep cracks.
It trails at least 90% of its competitors over the past one, three and five years, according to Morningstar. Its 3.7% loss so far this year trails more than 80% of its peers. If things don't turn around soon, the fund will have trailed at least three-quarters of its competitors in each of the past four years.
Hey, Ima Loser
Source: Morningstar. Returns through Sept. 17.
Making matters worse, the fund's manager and style switches have led to above-average turnover and taxable distributions. Nearly seven in 10 peers were more tax-efficient than this fund over the past 10 years.
Sagging returns and fat tax bills are a lousy combination. Ignore this fund until it manages to string together a few solid years.
Ian McDonald writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to
email@example.com, but he cannot give specific financial advice.