Four of the Best Small-Cap Funds

04/09/2014 10:00 am EST

Focus: FUNDS

In Kiplinger's Personal Finance, Nellie Huang highlights four of the best bets among small-cap funds—those with a combination of above average upside performance and below average volatility.

Steve Halpern: Joining us today is Nellie Huang, senior associate editor at Kiplinger's Personal Finance Magazine. How you doing today, Nellie?

Nellie Huang: Oh, I'm doing really well. Thanks, Steve.

Steve Halpern: Well, thank you for joining us. Your latest featured article for Kiplinger's highlights the best small-cap mutual funds. Could you tell our listeners the overall criteria that you were looking for in coming up with this list?

Nellie Huang: Sure thing. We were looking for funds that had obviously outpaced their peer group in the Russell 2000 Index of small companies, but we were also looking for funds that charged average-to-low fees and that were less volatile than the typical small company fund—because these funds tend to return a lot, but they also tend to be very volatile.

Steve Halpern: Now, one fund with above-average returns and below-average volatility that you uncovered is the Baron Small Cap Fund Retail (US:BSCFX). Could you tell us the attraction there?

Nellie Huang: Well, this is one of our favorite funds. It's been run by the same manager since the fund launched in 1997, Cliff Greenberg. Baron is a growth fund shop. They like companies that are growing fast.

They're willing to pay a little bit more, say, than a value manager would spend on a growth stock, but they pay attention to value. They like growth at a decent price, basically.

This fund has grown a lot in assets because it's been around for so long, but the average market cap is about—the average size of the company in the fund is about $3.1 billion, which is still considered small.

It's got more than a hundred stocks in it, so some of them are bigger than others, but Cliff Greenberg is a really good—he's a sharp manager. He's been around a long time, and we like the way he runs the fund.

Steve Halpern: Now, another fund that makes your list is Homestead Small Company Stock (US:HSCSX). Could you tell us about that?

Nellie Huang: Sure. This is another one of our favorite funds. It's a member of the Kiplinger 25, which is our list of our favorite no-load funds. This fund is run by three managers: Mark Ashton, Peter Morris, and Stuart Teach.

They like out-of-favor firms that have a catalyst to turn around their businesses, so it might be a small company that the market't like for now, but they have some kind of catalyst for growth, meaning they've got a business that people are really going to pounce on soon, and no one recognizes it, but these three managers do.

They like companies they understand. They don't hold a lot of tech stocks, but when they find a company they really like, they hold on forever. The fund has very low turnover. I like that. I like managers who buy with conviction and stick around. They buy and hold; they're not trading fast with stuff they buy.

Steve Halpern: Now, another favorite on your list is one that focuses on the value side and that's T. Rowe Price Small-Cap Value (US:PRSVX). What do you like there?


Nellie Huang: The strategy behind this fund is, really, the unloved stocks—stocks that are unloved at the time or under-followed—you know, kind of hidden gems that people haven't discovered yet. I like that strategy because there's always money to be made before everyone rushes in, right?

The manager behind this fund, Preston Athey, is a pro at this. The fund that he runs is sizeable in assets. It's one of the bigger small company funds, and yet, Athey is able to hone-in on companies that have, maybe, an average of, about, just over a billion in market cap, which is a small company. It sounds big but that's quite small.

He's not afraid to venture in areas where people are kind of scared to venture, so we like that. Now, this fund is going, undergoing a change. Preston Athey is retiring in June and we're watching the fund.

The man that T. Rowe Price has tapped to take over is David Wagner. Wagner has a great record running another T. Rowe Price fund. I'm not so nervous about Wagner, but we will be watching this fund closely after Athey steps down in June.

Steve Halpern: Now, we have time for one more small-cap fund from your list. Let's look at Hodges Small Cap (US:HDPSX). Tell us why you like that situation.

Nellie Huang: Hodges is a little bit more volatile than the three funds we've just spoken about, but they have an amazing record. Since the fund launched, it has outpaced the Russell 2000 Index of small companies by an average of about four percentage points per year, which is a lot. That's every year it's ahead of the index for percentage points annualized.

These guys are down and dirty, fundamental stock pickers. They research about 700 companies every year.

They talk to thousands of people involved with those companies, whether it's the executives, customers, suppliers, competitors, and they're interested in growth stories and value stories. They're very versatile, but what I like about them most is that they really dig into a company's business.

Steve Halpern: Well, we really appreciate you taking the time to share your ideas with us. Thanks for joining us, today.

Nellie Huang: Thanks for having me, Steve.

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