11
Morningstar FundInvestor
April 2
013
Large sums of money moving in and out of funds that
focus on small- and mid-cap stocks can cause problems.
For several years following the October
2007
–March
2009
bear market, big outflows were far more likely.
But equities’ surge in
2012
and early
2013
has led
to net inflows for stock funds on a broad basis, so funds
are once again challenged by flows in either direc-
tion now. We don’t see these as looming disasters,
but they are something to keep an eye on.
Fund
Asset Base
One-Year
Flows
Fidelity Small Cap Stock FSLCX
$2.5 Bil
-$916 Mil
This fund has been in turnaround mode since manager
Lionel Harris took the helm in November
2011
, but it
hasn’t happened fast enough for fundholders frustrated
by bottom-quintile five-year returns. Redemptions
seemed to be slowing after the fund saw net outflows
in six of the past eight calendar years (the other
two years were slightly positive), but fundholder exits
picked up again in December
2012
as the fund
finished its first full year under Harris in the category’s
bottom quartile. (The fund also shifted categories,
from mid-blend back to small-blend as Harris refocused
the fund on small caps.) The fund’s
12
-month net
outflows represented a hefty
28%
of its asset base in
February
2012
. But the fund hasn’t been forced to
carry a large cash stake due to redemptions, and
Harris hasn’t reported any flow-related issues as yet.
The fund also owns just a small stake in tiny compa-
nies, which tend to be less liquid.
Fund
Asset Base
One-Year
Flows
Janus Triton JATTX
$4.5 Bil
$1.3 Bil
Janus Venture JAVTX
$2.1 Bil
$609 Mil
Consistent success has, not surprisingly, resulted
in a surge of popularity for funds managed by the duo
of Chad Meade and Brian Schaub.
Janus Triton
JATTX
has beaten its typical small-growth peer and
Russell
2500
Growth benchmark every calendar year
during their nearly seven-year tenure, and it’s grown
dramatically as investors have beaten a path to their
door. Net inflows over the past
12
months represented
65%
of its asset base one year ago and have combined
with investment gains to more than double the fund’s
size over that span. (The fund has taken in a net
$
3
.
3
billion over the past three years.) Meanwhile, the
managers have reinvigorated
Janus Venture
JAVTX
since taking the helm in July
2010
, and investors have
been pouring money into its coffers: Its
12
-month
inflows are equal to
45%
of its asset base a year ago.
Managers Meade and Schaub have thoughtfully
examined their capacity constraints, both by simulating
portfolio replication at higher asset levels and
measuring how long it would take to liquidate each
holding. Don’t be surprised if both close soon.
Fund
Asset Base
One-Year
Flows
Three-Year
Flows
Royce Low Priced Stock RYLPX
$2.8 Bil
-$1.2 Bil
—
Royce Value Plus RYVPX
$1.5 Bil
-$758 Mil
-$2.4 Bil
These small-growth funds, managed by Chip Skinner
and co-
CIO
Whitney George, have struggled mightily
of late:
Royce Low Priced Stock
RYLPX
(which
George leads) posted bottom-decile returns in
2011
and
2012
, while
Royce Value Plus
RYVPX
(which
Skinner leads) landed in the category’s bottom
15%
in
2010
and
2011
before enjoying a solid
2012
. Investors
have been pulling out. Low Priced Stock’s
12
-month
net outflows were equal to
25%
of its asset base a
year ago, while Value Plus’ outflows equaled
36%
of
its asset base.
Low Priced Stock was closed to new investors from
early
2011
through September
2012
, but net outflows
have actually picked up since it reopened. Value
Plus’ outflows have moderated a bit thanks to its
2012
showing. The managers haven’t disclosed
any issues related to those outflows, but it’s fair to
wonder whether redemptions have affected the
investment process—particularly at Low Priced Stock,
which has a smaller-cap profile than either its
sibling or its typical peer and which continues to
endure performance issues.
œ
Contact Greg Carlson at
Big Flows Present Challenges to
These Small-Cap Funds
Red Flags
|
Greg Carlson
What is Red Flags?
Red Flags is designed to alert
you to funds’ hidden risks.
Such risks can take many forms,
including asset bloat, the
departure of a solid manager,
or a focus on an overhyped asset
class. Not every fund featured
in Red Flags is a sell, and in
fact, some are good long-term
holdings. But investors should
be prepared for a potentially
bumpier ride in the near future.
