While it makes sense for many of us to own a small-cap value fund, it doesn't make sense for anyone to pick one that charges an arm and a leg.
Large-Cap Value Funds
Mid-Cap Value Funds
Small-Cap Growth Funds
Mid-Cap Growth Funds
Large-Cap Growth Funds
Small-cap value funds hunt bargains among the vast ranks of companies with a market capitalization below roughly $2 billion. This is essentially the stock market's wasteland with no household names and little coverage from Wall Street analysts. Consequently, these funds are wallflowers, but a diversified stock portfolio would have 5% to 10% of its assets invested in small-cap value stocks using the
Wilshire 5000 Total Stock Market Index
They might be getting more attention than usual these days because their cheap fare got a nice boost when big-cap growth stocks wilted last year. Small-cap value funds quietly beat all other diversified stock-fund categories last year with a 17% average gain as the
lost more than 9%. And this year the average small-cap value fund is up 5.7%, second only to communications funds.
Small-Cap Value Check
Source: Morningstar. Annualized performance figures through Feb. 7.
Judging from the modest cash flows to small-cap value funds in recent years and their recent performance, it seems there are plenty investors who might be sniffing around this 121-fund category. If you're in this group, the Big Screen has whittled the field a bit.
First, we looked for small-cap value funds that beat their average peer over the past one- and three-year periods. Then we pulled out the funds with loads or sales charges, and expense ratios above the category's 1.56% average, since high fees can take a big bite out of your returns over the long term. Seven funds made our cut and here they are ranked by their three-year annualized returns.
As you can probably tell, small-cap value specialist Chuck Royce and his colleagues are bigwigs in this corner of the fund world. After all, three Royce funds made our list and a fourth,
Pennsylvania Mutual fund, is run by Royce and his colleague W. Whitney George.
Royce and George co-manage all of these funds, except for
Royce Opportunity where Boniface Zaino holds the reins, but not for long. Royce is gradually relinquishing his portfolio management duties. This might rattle some, but George and Zaino are well-schooled in Royce's approach, seeking cheap stocks with strong balance sheets. That style might not sound sexy, but each of these funds has used it to consistently beat their peers.
Royce Low-Priced Stock has the most impressive track record, beating at least 90% of its peers over the past one-, three- and five-year periods, according to
. The fund's 22% five-year annualized return beats the S&P 500 by more than four percentage points and 93% of its peers.
Morningstar ranks the fund from most risky to least risky in this order: Royce Opportunity, Royce Low-Priced Stock,
Royce Total Return and Pennsylvania Mutual. All four funds, however, are less volatile than their average peer.
A well-known small-cap value fund that didn't make our list but might be worth a look is the
Third Avenue Value fund, run by value maven Marty Whitman. He's run the fund since its 1990 inception, combing the market for profoundly downtrodden stocks. That's led to an eclectic portfolio that's essentially split between financials and technology stocks. At the end of 2000, these more than 70% of the fund was invested in these sectors.
Whitman's buy-and-hold approach was quite tax-efficient until last year when the fund paid out a couple of sizable capital gains distributions. That said, he has rung up solid gains. His fund beats more than 80% of its peers over the past three-, five- and 10-year periods, according to Morningstar. The fund's 18.2% 10-year annualized return narrowly edges out the S&P 500 and beats 81% of other small-cap value funds.
Why isn't the fund on our list? The fund's 16.3% gain over the past 12 months lags its average competitor.
If you're the curious type and are wondering what obscure stocks propelled these funds' returns, we've looked into the issue for you. We tossed the funds on our list into a pot and sifted their combined portfolios to find their combined top-10 holdings. Here they are, an eclectic and low-profile group to be sure.