Like the water boy who sheds his specs, dons a helmet and becomes a gridiron hero, mid- and small-cap value funds are getting a lot more popular.
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Like all value funds, they scour the market looking for unloved companies they think are trading for less than they're worth. Picking through the dustbin is never a glamorous exercise, and because these funds focus on smallish and often obscure companies, they're easy to ignore. That said, a diversified portfolio would have about 15% of its money in these funds, whose tech-light style has flourished recently.
Small-cap value funds are the top-performing fund category over the past 12 months, with an 18% gain, on average, according to Chicago fund-tracker Morningstar. The average mid-cap value fund isn't far behind with an 11% return, compared with a 22% slide for the
As you might expect, money is gushing into these funds. So today the Big Screen is sifting the some 250 funds in these bins to pick out a few we think you can't ignore. In each case we rounded up the funds that beat their average peer over the past one, three and five years. Then we yanked out any funds that have changed managers in the past three years, are closed to new investors or carry a minimum investment north of $10,000. Finally, we ranked the survivors by their five-year annualized returns and picked the top five.
Let's see who made the cut and then look at some others that merit an honorable mention, starting with mid-cap value funds.
The first three funds on our list stand out.
Bob Olstein, who recently stopped by for an
interview, is a value manager down to his DNA. An irascible fellow, he trolls for companies he thinks are trading far below their true worth and buys shares only after obsessively combing through the balance sheet, trying to smoke out any fuzzy math. He's run the
Olstein Financial Alert fund since its 1995 inception; it tops the S&P 500 and its peers over the past one, three and five years. The one knock on the fund is that it carries a deferred 2.5% sales charge, and its 2.2% annual expense ratio is far above the category's 1.41% average.
Lord Abbett Mid-Cap Value fund also carries sales charges, or loads, but it's worth a look if you work with an adviser. Edward von der Linde, the fund's lead manager since 1988, focuses on companies with battered stocks but solid revenue growth relative to their peers. His fund tops the S&P 500 and at least 70% of its peers over the past one, three, five and 10 years.
Longleaf Partners fund is a solid choice. O. Mason Hawkins has led the fund's management team since its 1987 inception, buying shares of companies the team believes are trading for 40% less than they're worth. The fund holds just 20 to 25 stocks, but its bets have paid off. It beats both the S&P 500 and its average peer over the past one, three, five and 10 years.
There are three standouts among the five small-cap value funds that made our cut.
You probably haven't heard of the no-load
Turner Small Cap Value fund, formerly the
Clover Small Cap Value
fund, but that's not because of a weak record. Lawrence Creatura and Michael Jones have run the fund since its 1996 inception, and they've demonstrated a knack for finding bargains among the tattered stocks of small companies. The fund beats the S&P 500 and at least 90% of its peers over the past one, three, five and 10 years.
Joel Tillinghast and his
Fidelity Low-Priced Stock fund have perhaps gotten too much attention and money, but that hasn't slowed the fund down. With more than $10 billion in its coffers, compared with $260 million for its average peer, the fund is nothing short of mammoth. A huge asset base can make it hard for a fund to maneuver in the less liquid small-cap market, but amazingly that hasn't been a problem here. Tillinghast, who has run the fund since its 1989 launch, holds more than 700 stocks, compared with 200 for his average competitor, but he has still posted solid numbers. The fund, which carries a maximum 3% sales charge, beats the S&P 500 and at least 75% of its peers over the past one, three, five and 10 years.
Another of the category's stars is the no-load
Royce Total Return fund, co-managed by Chuck Royce and Whitney George since its 1993 inception. By focusing on dividend-paying companies they think are underestimated, they've beaten the S&P 500 and their average peer over the past one, three and five years. Royce, who specializes in this style, recently sold his firm to Legg Mason, so the only potential concern here is the continuity of the fund's management in the years down the road.
While all of these funds are intriguing, a quantitative screen can sometimes be too blunt, leaving some solid choices out. Here are a few that didn't end up in our net but are still worth a look.
Wally Weitz, manager of the no-load
Weitz Value fund since its 1986 launch, likes to make big bets on sectors and companies where he sees value. He's often been right: His fund tops the S&P 500 and at least 70% of its peers over the past one, three, five and 10 years. He's not on our list because of his fund's steep $25,000 minimum investment.
Bill Nygren, manager of the no-load
Oakmark fund since March last year, has posted solid numbers, but the fund missed our cut because of a weak three-year return. Nygren, who spoke with
recently, made his name running the
Oakmark Select fund, which isn't on our list because it's closed to new investors.
The small-cap and no-load
Third Avenue Value fund didn't make our cut because Marty Whitman's 33% tech stake has hurt returns over the past year. It's still worth considering, though, because his strict value approach has helped him beat the S&P 500 and most of his peers over the past three, five and 10 years.
One Group Small Cap Value fund's 13.7% five-year annualized return just barely missed the top five, and the fund still deserves your attention. Lead manager Chris Guinther has run the fund since its 1995 launch, consistently beating the fund's average competitor and the S&P 500.
Well, there you have it, a short list for the long lines of value-fund shoppers.
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
firstname.lastname@example.org, but he cannot give specific financial advice.