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With small-cap benchmarks lagging larger-cap
counterparts, is now a good time to invest in small-
cap funds? There is no easy answer—for example,
conventional wisdom says that rising interest rates
are hard on smaller companies, but then again,
the economic growth that often accompanies such
increases could be a tailwind. But for most stock
investors, it is always a good time to have some small-
cap diversification.
Still wary? We compiled a list of small-cap Morningstar
Medalists that have had lower downside capture
ratios relative to the S
&
P
500
than the
Vanguard Small-
Cap Index
VSMAX
has had. Six of the seven funds
below had lower downside captures over not only the
past three years but also the five- and
10
-year
periods. The exception is
Mairs & Power Small Cap
MSCFX
, which doesn’t have a five-year record yet
but is likely to continue to be relatively temperate.
Conestoga Small Cap
CCASX
This fund’s managers take a relatively conservative
approach to the small-growth universe. They
are patient, seeking investments with the potential
to appreciate by at least
100%
over three to five
years, and they tend to hang on to their picks for about
that long. They prefer companies with strong fran-
chises and at least a
15%
return on equity, as well as
a debt/total capitalization ratio of less than
40%
.
They invest with conviction, holding between
40
and
50
names, have much leeway to deviate from the
Russell
2000
Growth Index’s sector weightings, and
also try to stay fully invested at all times. The
result is one of the strongest
10
-year risk-adjusted
records in the small-growth Morningstar Category.
Below-average expenses and a small asset base add
to the fund’s attraction.
Mairs & Power Small Cap
MSCFX
This young fund doesn’t have a five-year record
yet, but it follows Mairs
&
Power’s long-established
strategy of buying and holding financially sound
businesses with sustainable competitive advantages
that can deliver consistently above-average returns
on equity. The resulting high-quality portfolio has
shown moderate volatility so far—and is the same
strategy that enabled the firm’s all-cap flagship
Mairs
& Power Growth
MPGFX
to outperform most of its
category peers in
2008
’s bear market. This fund’s lead
manager, Andrew Adams, has been a significant
small-cap resource for the Growth fund and is now
comanager there. Like its older sibling, this fund
emphasizes businesses headquartered nearby in the
upper Midwest, where the managers believe
they have a research advantage. The fund is backed
by a firm that has been an exemplary steward of
shareholder capital and is committed to closing this
strategy before it gets too large.
Neuberger Berman Genesis
NBGNX
Veterans Judy Vale and Bob D’Alelio implement a
long-term, fundamentally driven strategy. They
look for small-cap stocks, preferably not too cyclical,
that dominate a competitive niche and feature
solid balance sheets, strong cash flows, and reason-
able valuations, and often hold on to favorites for
many years. While the fund sometimes lags when
lower-quality stocks lead, its
15
-year returns rank
in the top
2%
of the small-growth category as of
December
2015
, and it has been one of the least
volatile funds. A caveat: With more than
$10
billion in
assets, this is among the largest funds in the cate-
gory, even after suffering
$5
billion in net outflows in
recent years. The managers argue that the fund’s
quality bias and low turnover allow them to handle
size and outflows relatively easily.
Perkins Small Cap Value
JSCVX
This recently reopened fund has reliably provided
downside protection despite some team turnover. The
approach focuses first on how much a stock could
potentially lose, and the portfolio routinely sports a
lower debt/capital ratio and higher returns on
invested capital than the Russell
2000
Value Index.
That’s helped the fund hold up relatively well in
Great Small-Cap Funds
Morningstar Research
|
Laura Lallos