Four small-cap funds that offer some sunlight in cloudy market

Small-cap stocks remain market's best performers

Dollars & Sense

November 04, 2001|By Brian Portnoy | Brian Portnoy,MORNINGSTAR.COM

Small-cap blend funds have offered a few rays of sunlight in a very cloudy market.

Even with the flight to safer large caps after the Sept. 11 tragedy, small-cap stocks continue to be the equity market's best performers this year so far. And small-blend funds, which provide core exposure to the small-cap universe, have held up relatively well.

For the year to date through Oct. 22, the average small-blend offering has lost "only" 5.7 percent, which is 11 percentage points less than the S&P 500 index.

Value stocks continue to far outpace growth stocks, so among Morningstar's nine diversified domestic-equity categories, only the small-value and mid-value groups have performed better.

The market's continued difficulties have presented an opportunity to re-evaluate our list of picks, which we've amended.

First, we've cut Vanguard Small Cap Index. While it remains an ultra low-cost means to get small-cap exposure, its long-term results in beating actively managed options are unimpressive.

Further, our other two picks, Gabelli Small Cap Growth and T. Rowe Price Small Cap Stock, have been solid rather than exceptional performers. While both remain on the list, they'll need to distinguish themselves from the pack more than they have lately to avoid getting the hook.

Finally, we've added Westport Small Cap and Wasatch Core Growth to the list. Both have posted head-turning results over their respective lifetimes.

Westport Small Cap R: It doesn't have the longest track record, but it's certainly one of the category's most impressive. Managers Andy Knuth and Ed Nicklin aren't aggressive-growth investors, but their portfolios often tend to have relatively high price multiples.

However, that's largely because they buy cheap stocks and let the winners ride; the fund's 15 percent turnover ratio is a fraction of the category average. The fund always carries a big cash stake, which has muted volatility, although the fund's sector bets do curry some risk.

Don't be concerned over the fund's mere four-year record: Both Knuth and Nicklin have had long, successful investing careers before taking the reins here. The fund's above-average expense ratio is our one knock against it.

Wasatch Core Growth: The Wasatch fund family has shown the merits of doing just one thing and doing it very well. It invests only in small caps, and most of its offerings have numbers to brag about.

This fund, which is Wasatch's core small-cap offering, has the category's best 10-year record.

The fund focuses on stocks with brisk, consistent growth rates but attractive valuations. It takes big stock and sector bets, which juices volatility, but its risks aren't out of control. Management has a record of closing the fund when assets flow in too quickly, but it was recently opened once again to new investors. It's a great opportunity to own one of the best, despite its 1.38 percent expense ratio.

T. Rowe Price Small Cap Stock: Slow and steady is the name of the game here. Manager Greg McCrickard doesn't aim to blow away the competition at any moment in time. He edges ahead of the pack bit by bit and has a knack for finishing in the category's top half.

Indeed, through smart stock-picking that balances growth and value, his long-term results comfortably beat those of the average peer. And because he spreads his bets across most industries and a lot of names, the fund sports only moderate risk.

It's a cautious choice. With such steadiness, and below-average expenses, the fund deserves its place in Morningstar's 401(k) plan. One concern, though: Its swelling asset base has the potential to cause trouble.

Gabelli Small Cap Growth: This has been another solid, if unexciting, performer. Contrary to its name, this fund scouts for solid companies that trade for less than manager Mario Gabelli's estimate of their worth and that have catalysts to unlock their value.

Don't expect this fund to shoot the lights out, though.

Gabelli's valuation bent often keeps the fund out of hot growth sectors. At the same time, the fund's moderation is also its virtue. Stable, solid returns with relatively little volatility make it a good choice for more conservative investors.

However, we've been unimpressed by its inability to pull away from the pack in recent years.

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