Oak Ridge Dynamic Small Cap I (ORSIX) — launched in September 2015 — seeks to capitalize...
Virtus KAR Small-Cap: Too Good to Be True?
10/03/2017 5:00 am EST
After all, not only is this small-cap growth fund, which over the past five years has racked up annualized returns of 18.5 percent, in the top 1 percent of its category for that period of time.
When we look at any meaningful time frame, Virtus’s performance leaves every other general fund and market index in the dust.
Over the past three and five years, according to Morningstar, it has been the top-performing general (as opposed to sector-specific) mutual fund. At the same time, and remarkably for a small-cap growth fund, it has demonstrated impressive defensive characteristics.
Let’s start with its superior defensive credentials. Since 2008, the year Virtus’s current management team took over, small-cap stocks have endured three particularly tough years: 2008, 2011, and 2015.
In all three years, small-cap indexes like the Russell 2000 plummeted. The drop was particularly severe in 2008, and in that horrific year Virtus lost about 35 percent. But in 2011 and 2015 taken together, Virtus managed a cumulative gain of more than 20 percent.
Currently Virtus holds approximately 12 percent of its portfolio in cash and short-term securities, yet year-to-date, it has gained over 20%.
How do managers of a $1 billion fund, which is widely diversified across market sectors and even has small positions in Chinese and Argentinian stocks, perform so well so consistently?
You won’t find the answer by looking at such gross metrics as P/Es, book value, or sales. Rather, the two managers seem to have imbibed Warren Buffett’s stock-picking approach and applied it to smaller-cap stocks. I.e., there is a strong focus on stocks with moats (barriers against competition).
One example among their holdings is The Chef’s Warehouse (CHEF), which sells specialty food products to top chefs that own or operate high-end food establishments, including restaurants and culinary schools.
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