It’s been a nice run for small caps. The typical small-
cap fund has gained an annualized
14%
over the
past three years and
7%
over the past five years.
Even in the recent “tapering” sell-off, small caps
suffered about half the losses of large-cap stocks.
Yet investors, whose dollars often follow strong per-
formance, seem not to have noticed. Most small-cap
funds are seeing money go out the door rather than in.
Those flows could spell opportunity, as our Buy the
Unloved studies suggest. But they could also signal a
problem. And the rally we’ve seen makes it easy to
see why some investors argue small caps aren’t cheap.
Although some of the best small-cap funds have
closed recently, there are more good funds still open
than you typically see five years into a strong rally.
Let’s take a look at the opportunities and potential
pitfalls awaiting investors in small caps.
Outflows
The good news about outflows is that it means some
funds have not grown too large nor have they had
to close because of hot money. Quite a few Morning-
star Medalists have had net outflows for the six
months ended May
31
, and the June sell-off will only
increase that.
Seventeen Morningstar
500
small-cap funds have
less than $
700
million in assets including Silver-rated
Century Small Cap Select
SXMVX
,
Conestoga
Small Cap
CCASX
,
Bogle Small Cap Growth
BOGLX
, and
Berwyn
BERWX
. All remain open and
are either receiving small inflows or small outflows.
This means that the fund managers have free rein to
invest without being encumbered by asset bloat.
If the outflows continue through the year, we may see
some good funds reopening to new investors, so
build your watchlists. Gold-rated
Perkins Small Cap
Value
JSCVX
shed $
484
million through the past
six months to get down to a $
2
.
5
billion asset base.
Gold-rated
Artisan Small Cap Value
ARTVX
has
seen $
270
million go out the door so that assets are
down to $
2
.
7
billion.
I’m also intrigued by
Loomis Sayles Small Cap
Growth
LCGRX
, which has shed a more modest $
46
million to get down to $
945
million in assets. Silver-
rated
American Century Small Cap Value
ASVIX
is down to $
2
billion after $
49
million in redemptions.
Now for the bad news about outflows. Small caps
aren’t always that liquid, and forced selling from
redemptions can lead a fund to drive down the price
of a stock on its way out the door. We asked one
small-cap shop if outflows were creating a problem.
The firm said no, there are plenty of buyers in a
rally and they can unload stocks easily. I’m sure that’s
the case, but what if the rally turns into a bear
market? If a fund is getting redeemed now, you can
be sure it will really get clobbered with outflows
in a down market. And that’s when it’s hard to sell.
The five Morningstar
500
funds with the greatest
outflows are
Royce Low Priced Stock
RYLPX
($
993
million), Perkins Small Cap Value ($
680
million),
Fidelity Small Cap Stock
FSLCX
($
677
million),
Continued on Page 2
The State of
Small-Cap Funds
Fund Reports
4
Dodge & Cox Balanced
Fairholme Focused Income
T. Rowe Price Emerging
Markets Stock
Vanguard Wellesley Income
Morningstar Research
8
Your Guide to Emerging Markets
The Contrarian
10
The Other Side of the Yield Trade
Red Flags
11
TIPs Get Smacked
Market Overview
12
Leaders & Laggards
13
Manager Changes and News
14
Portfolio Matters
16
Simplifying a Seasoned Profes-
sional’s Portfolio
Tracking Morningstar
18
Analyst Ratings
Income Strategist
20
FundInvestor 500
22
FundInvestor 500 Spotlight
23
Follow Russ on Twitter
@RussKinnel
RusselKinnel,
Director of FundResearch and Editor
FundInvestor
July 2013
Vol. 21 No. 11
Research and recommendatio s for the s riou fund investo
SM
