Small
Funds With
Big-Time Track Records
By Richard Moroney, editor
Dow Theory Forecasts
Big
funds from big-name fund families like Fidelity, Janus, and Vanguard
tend to attract the lion's share of investor's attention. That
is unfortunate. Many lesser-known funds have delivered impressive
returns over the past few years, often outperforming their more-famous
peers. Given the advantages of smaller funds, investors should
take notice of these undiscovered gems.
Portfolio managers
of smaller funds can buy and sell without worrying about moving
share prices. Many times, big funds cannot buy stocks without
pushing prices upward and cannot sell without pushing prices
downward. For the largest funds, unwinding or taking a position
in a stock can take weeks, versus just days for small funds.
Unlike many large funds, some small funds can benefit significantly
from buying shares at the initial public offering.
The larger the fund,
the harder it is to put money to work and make meaningful stock
picks. There is little chance Fidelity Magellan, with its $73
billion in assets, can invest in the same small, fast-growing
companies that made the fund famous. For example, if Magellan
could purchase every share of Action Performance the best-performing
stock in the S&P SmallCap 600 Index this year the stock would
make up a measly 0.7% of assets.
Moreover, funds may
stray from their original objectives as they grow. Some fast-growing
funds start to hold a larger percentage of assets in cash because
the manager cannot find attractive opportunities. Others migrate
toward larger stocks, which can alter the style along the way.
That makes it hard to evaluate a manager's track record. Style
is defined by whether a fund holds large-, mid-, or small-capitalization
stocks, and by whether those stocks are value or growth oriented.
Still other funds simply buy more stocks, watering down a manger's
favorite picks.
Small funds have their
drawbacks. Because they have fewer shareholders to cover costs
for marketing, distribution, and other services, they tend to
have higher expense ratios. Some small funds never gather enough
assets to be profitable for their fund companies and are folded
into another larger fund. And finding information on small funds
may be difficult. Finally, some small funds may be more volatile
than their larger, more broadly diversified counterparts.
Conclusion
Fund-rating
service Morningstar found that value funds are typically hurt
less by a large asset base. But swelling assets can negatively
impact growth funds, particularly small-company growth funds.
That is because growth funds tend to chase fast-moving stocks,
so they have a harder time buying their fill of a stock when
assets are growing rapidly. And increased trading translates
into higher costs, which can weigh on returns.
All of the funds have less than $200 million in assets, expense and turnover ratios equal to or below their category averages, and better-than-average relative performance for one and three-year total returns. All 12 are no-load funds and have had the same manager for at least three years. Two standouts are profiled below.
Jensen (JENSX) offers a low-risk play on large-company growth stocks. A diverse collection of companies results in fairly broad industry diversification. Top holdings are giants such as Automatic Data Processing (NYSE ADP $56), Clorox and Equifax (NYSE EFX $25). Top sectors include services (24% of stocks), financials (19%), and health care (18%). Jensen ranks among the top 5% of large-company growth funds for one-, three-, and five-year total returns. The fund soared 20% in 2000, compared to a loss of 14.5% for category. The fund, down just 1.7% in 2001, has some $65 million in assets.
Schroder U.S. Smaller Companies (SCUIX) focuses on small-company growth stocks. But at the end of October, mid-sized companies represented about one-half of total assets. Still, the median market value for the stocks in the portfolio is soundly in the small camp at only $1.4 billion. The fund, which notched a 31% gain in 2000, is up 6% so far in 2001. Over the last five years, the fund has posted a 12.8% annualized return, ranking it among the top 20% of small-company growth funds. Schroder's asset base is only about $28 million.
Editor's Note: Richard Moroney is editor of Dow Theory Forecasts, 7412 Calumet Ave., Hammond, IN 46324, 1 year, 52 issues, $259. Visit the Web site at www.dowtheory.com.
