3 Small-Cap Funds Delivering Steady Performance
Investors should not be surprised by the turbulent performance of small-cap funds. Many academic studies have shown that small-cap funds can be more volatile than large stocks. During rough times panicked investors can suddenly dump little-known small stocks and take refuge in giant blue chips, which seem like safer bets.
Although they come with risk, small stocks belong in nearly every portfolio because they can deliver strong long-term returns. Small-cap funds have ranked as one of the top-performing categories in recent years. During the past 10 years, small value funds returned 7.7% annually, outdoing the S&P 500 by four percentage points.
To find steady small-cap choices, I searched for funds that had outperformed their categories while taking only moderate risks. I started by screening for funds with strong five-year records. To avoid risky choices, I looked for funds with below-average volatility, as indicated by standard deviation, a measure of how much an investment bounces up and down. The winning funds include Hancock Horizon Burkenroad Small Cap
Among the strongest performers last year was RS Select, which returned 5.3%. During the past five years, the fund has returned 7.3% annually, outdoing 97% of funds in the small growth category. The RS managers prefer companies with track records for delivering consistent growth and rich profit margins. The managers aim to buy stocks that can continue growing for the next three years because of clear competitive advantages.
Portfolio manager Melissa Chadwick-Dunn says that many of the fund's stocks proved resilient during the rough markets of last year. "We have leading companies that people want to own during flights to quality," she says.
A holding is Align Technology
Another holding is Core Laboratories
The Hancock Horizon fund has delivered steady results by following an unusual regional strategy. Based in New Orleans, the portfolio managers buy stocks that are headquartered in Alabama, Florida, Georgia, Louisiana, Mississippi, and Texas. Partly because the region is home to many companies in energy and basic materials, Hancock Horizon tends to be overweighted in those sectors. The portfolio is light on technology, an industry that is not concentrated in the South.
The home-grown strategy may limit selections, but the approach seems to work. During the past five years, the fund has returned 7.9% annually, outdoing 98% of competitors in the small blend category. The portfolio managers favor steadily growing companies that sell at reasonable prices. Many holdings are mundane businesses that attract little coverage from Wall Street analysts.
A holding is Sanderson Farms
Another holding is Tupperware Brands
The Tocqueville Opportunity fund looks for moderately priced companies that can grow at double-digit rates. During the past five years, the fund has returned 2.8% annually, outdoing 65% of small blend funds. The portfolio managers particularly like companies that can surprise Wall Street, growing faster than analysts expect. The managers favor companies with competitive advantages and distinctive products.
A holding is Dunkin' Brands
He also likes Herbalife