Last month we purchased Fidelity Limited Term Bond (FJRLX) in our model portfolio. Part of our strat...
A Small Growth Fund That Watches Risk
05/14/2009 12:00 pm EST
Russel Kinnel, editor of Morningstar FundInvestor, and analyst Karin Anderson, find a small-cap growth fund, which does well in down markets as well as rising ones.
While it hasn’t dazzled in recent years, we think that Wasatch Small Cap Growth (WAAEX) makes sense for the long haul. Some investors are likely disappointed by this fund’s few years of middling relative performance and 2008’s staggering 42% loss, but this small growth fund’s long-term risk/reward profile has shone under the watch of seasoned manager Jeff Cardon.
Cardon has been this fund’s lead manager since its 1986 inception. Fundamental analysis drives [his] stock-picking process. He looks for companies with market capitalizations of $1.5 billion or less that are increasing their earnings by 15% or more over the next five years. He also gravitates toward companies with little or no debt that boast management teams with high inside ownership.
The team has been working harder to uncover firms in the energy and industrial-materials sectors, because few names in those industries meet its criteria. The fund’s lower exposure to these areas was a drag on relative performance during their multiyear rally, which ended in 2008.
Cardon lets winners run, including auto-parts retailer O’Reilly Automotive (Nasdaq: ORLY). The company has been in the portfolio for more than 15 years, because it continues to meet his investment criteria. Cardon’s generally patient approach is reflected in the fund’s low turnover, which typically remains at or below 50% annually.
This fund has an excellent long-term record. Since its December 1986 inception, the fund has posted an impressive 10% annualized return. The fund’s performance hasn’t dazzled in recent years, due in part to Cardon’s avoidance of cyclical fare. But the fund has been a consistent outperformer relative to the typical peer and the Russell 2000 Growth Index, particularly in down markets.
Losing less in market downturns equates to a relatively easier road to recovery, which is certainly key after 2008’s staggering 42% loss. In the 169 one-year rolling periods of the past 15 years, the fund consistently stayed ahead of the typical peer, and it outperformed them in the negative periods more than 75% of the time. Things have looked a bit brighter for small caps in 2009, and the fund’s 7% gain for the year to date ended April 16, 2009, trounced more than 90% of its peers’.
This fund’s 1.21% annual expense ratio hovers just around the median compared with similar no-load funds. This levy has ticked up a bit in recent years as assets under management have fallen. We think there is room for this price tag to come down as assets under management stabilize and grow.
We’re pleased by the amount of manager investment here. As of March 24, 2009, Cardon had more than $1 million invested in this fund.
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