Our findings in the small-cap value pack include some of the category's greatest hits.
Starting at the top, we've got the
Fidelity Low-Priced Stock fund where Joel Tillinghast has called the shots since the fund's launch at the end of 1989. In that time he's topped his average competitor in 10 of the past 12 calendar years. Tillinghast was
our pick for fund manager of the year for 2001, when the fund gained 27% and beat its average peer by more than nine percentage points. The fund's near- and long-term track record is even more impressive in light of its biggest drawback: its size.
Most small-cap funds close to new investors before they hit the $2 billion asset mark because a larger asset base makes it tough to shift around nimbly in the less liquid small-cap market. Tillinghast's fund had a whopping $12.4 billion in assets at the start of this month, compared with $350
for its average peer.
To compensate for the fund's stunning size, Tillinghast spreads the fund's cash among more than 800 small-cap stocks in which he sees a modest valuation and solid earnings growth. That breadth hasn't sapped the fund's returns so far, but it could down the road, so you might want to look at some of the others on our list.
, a renowned small-cap value specialist bought by
in October, has two no-load funds on our list:
Royce Micro-Cap and the
Pennsylvania Mutual fund.
Whitney George took the Micro-Cap fund's reins from Chuck Royce at the start of last year, but he had co-managed the fund since 1993. He maintains the firm's long-held strategy of focusing on stocks of small companies in which they see healthy balance sheets, a reasonable valuation and the potential for solid earnings growth.
Royce and George together run the Pennsylvania Mutual fund, essentially blending picks from the Micro Cap and the
Royce Premier fund, which focuses on stocks of small-cap companies. Both the Micro-Cap and Pennsylvania Mutual funds top their average peer over the past one, three, five and 10 years. Some might be rattled by the firm's recent sale, but Royce and George signed contracts to continue managing the funds for at least five more years.
Bob Rodriguez, manager of the broker-sold
FPA Capital fund since its 1984 start, actually won Morningstar's manager of the year award last year for his work on a
FPA New Income. With this stock fund, he typically holds between 35 and 40 stocks of companies in which he sees a healthy balance sheet, solid cash flow and a reasonable valuation. He's shown dexterity in picking stocks as well as bonds, beating both his average peer and the
over the past one, three, five and 10 years.
Franklin Micro Cap Value fund's presence on this list underscores why a fund isn't necessarily good for you just because it clears our hurdles. Bruce Baughman, the fund's lead manager since its 1995 launch, typically buys stock of companies with little debt that are trading at a discount to their book value, or what a company would be worth if its real assets were liquidated. The fund's strict style has led to feast or famine results. Over the past six calendar years, for instance, it has beaten its average peer only three times.
That said, the fund tops more than 70% of its peers over the past five years, mainly due to a boffo 2001 when investors favored the smallest and cheapest stocks they could find. The fund gained 42% last year, beating its average peer by 24 percentage points. Those expecting similar gains any time soon are probably in for a nasty surprise, though.
Another small-cap value fund not on our list that's worth considering is the
Third Avenue Value fund, which Marty Whitman has run since its 1990 launch. Whitman trolls for battered stocks of companies with bleak near-term outlooks in which he sees a rosier long-term story. He usually only buys shares of companies he thinks are trading for half their intrinsic value.
While the fund's 15.7% 10-year annualized gain trounces its average peer and the S&P 500, Whitman tends to focus on financials and tech stocks, and that's kept him behind his peers over the past year. Also, value purists probably shouldn't bother with the fund because his picks have ranged from Japanese insurers to the debt of buckling Web site host
. That said, his flair for delivering solid, tax-efficient returns over time is tough to knock.
Click on these links to check out the other funds we dug up:
Large-cap value funds
Mid-cap value funds