On August 1, Fidelity took direct aim at index fund competitors Vanguard, Blackrock’s iShares ...
Small-Cap Fund Favorites
04/17/2015 9:00 am EST
All things considered, 2015 could be a banner year for small companies and we expect good things from our three small-cap mutual fund holdings, suggests Benjamin Shepherd, editor of Personal Finance.
Wasatch Small Cap Growth (WAAEX) is one of our favorites, both for its performance and its idiosyncratic investment approach.
Manager Jeff Cardon focuses on strong businesses, companies that can grow earnings at least 15% a year and can double them every five years. He also likes proven management teams and clean balance sheets. And he’s willing to invest almost anywhere, with about 20% of his portfolio in foreign stocks.
Cardon sticks to his strategy through thick or thin; currently the fund is overweighted in industrial names, at 27.3% of assets. He also favors healthcare and technology stocks at 20.7% and 22.9% of assets.
Schwab Small Cap Equity (SWSCX) consistently ranks near the top of its small blend category. Over the trailing three-year and five-year periods, it ranks within the top 5%.
Its Emergent BioSolutions (EBS) develops vaccines and other therapies while helping governments develop countermeasures against bio-terror attacks.
The fund is pretty cheap, with an expense ratio of 1.10%, well below average, and it has an initial minimum purchase of just $100. It’s not particularly tax-efficient, though, with an annual turnover rate of 103%, turning over its entire portfolio each year.
The cheapest and most reliable fund in our stable of small-cap recommendations is T. Rowe Price Small-Cap Value (PRSVX), whose long time manager, Preston Athey, stepped down last June and was replaced by David Wagner.
However, the strategy remains focused on finding small companies that are undervalued. Once those companies are found, the winners are allowed to run, resulting in extremely low portfolio turnover.
It’s a prototypical value approach. But unlike some managers who can waver when times get tough, value investing is almost like a religion here. As a result, the fund tends to lag in up markets while faring better than its peers on the downside.
Most recently, the best bargains have been found in industrials, financials, and basic materials, where the fund is overweighted relative to both its peers and its benchmark.
It also clearly favors real estate and utilities. Top holdings include transportation company Landstar System (LSTR), railroad operator Genesee & Wyoming (GWR), and bank holding company East West Bancorp (EWBC).
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