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Mutual fund companies like to use images of travel in their fund names to convey the idea that managers are journeying to the far reaches of the stock market to find stocks no other manager would appreciate. Dozens of funds have names like “explorer,” “discovery,” “quest,” or “voyager,” and there is an entire mutual fund family named Pioneer.
Still, it seems far too often that investors wind up owning funds holding the same mega-cap companies thousands of other funds own. There are hundreds of funds—including actively and passively managed core, value, and growth funds—that have Apple, ExxonMobil and Microsoft in their top 10 holdings.
This is hardly surprising and not even a real problem except for those who want to diversify their portfolio away from the widely held and researched companies that effectively comprise the market and therefore aren’t very likely to outperform it.
For those who are interested in putting some portion of their holdings into an equity fund that is not dominated by stocks they already own in other funds, there are microcap funds, a loosely defined category that usually refers to companies worth anywhere from $50 million to $1 billion. While these funds can be more volatile than funds owning larger, more widely held companies, they are one of the few places that truly offer new “opportunities” (another popular fund name, by the way).
There are now about 20 domestic equity mutual funds that identify themselves as “microcap,” including some that also invest in small-cap issues as well. Over the past five years, these funds have delivered returns that range from to a 7.52% average annual gain to a 6.01% annual loss. Annual expenses vary from a low of 1.07% to more than 3%. Several funds have more than $100 million in assets, though most are considerably smaller.
To find the most attractive, we looked for funds that are open to new investors and have no sales load. From these we chose three funds that delivered the best long-term performance over the past three- and five-year periods at a reasonable cost.
The $91 million Satuit Microcap Fund (SATMX), the only mutual fund offering from South Carolina-based Satuit Capital, owns the best three-year performance record and the second-best five-year record among the group. Since it opened in December, 2000, it has delivered an average annual total return of 11.44%, according to Lipper data, with losses in just two calendar years – 2002 and 2008. It buys companies with market capitalizations of less than $500 million, and the average holding has a market cap of about $348 million, as of June 30, 2010. The fund had a very attractive dividend yield of 3.19% as of mid-year, though its annual turnover of 142% is pretty high. Its top three holdings as of July 31, 2010 were San Diego-based Entropic Communications (ENTR), which designs semiconductors used in home entertainment systems; Wisconsin-based Ladish (LDSH), a maker of aerospace and industrial metal components; and Philadelphia-based Quaker Chemical (KWR).
With $171 million in assets, the Wasatch Microcap Value (WAMVX) fund is much larger and has the best five-year performance record along with the second-best three-year record and a healthy 9.6% total return since it opened in July 2003. It is only open to investors who buy shares directly, however, and its expenses are on the high side of its 1.45% peer average. It will own companies up to $1 billion in market cap, though its average holding is worth about $360 million. The fund’s top three holdings as of mid-year were TTM Technologies (TTMI), a Wisconsin-based maker of printed circuit boards; Solar Capital (SLRC), a New York-based private equity investment company; and India-based Karnataka Bank (KTKBANK).
Another fund worth considering is the $117 million Managers Micro-Cap Fund (MIMFX, and formerly known as the Fremont Microcap Fund), which delivered an impressive 12.36% average annual return since it started in June 1994. It has the third-best performance record for microcap funds, after the Wasatch and Satuit funds, over the past three- and five-year periods, and charges significantly lower annual fees. Its universe is limited to the smallest 5% of listed companies, and its portfolio has an average market cap of about $500 million. The fund is not managed in-house, however, but by four sub-advisors. As of July 31, 2010, its top three holdings were Pennsylvania-based electronic component maker Spectrum Controls (SPEC); LaBarge (LB), a St. Louis-based contract electronics manufacturer; and Amherst, New York-based Columbus Mckinnon (CMCO), which makes hoists, cranes and other lifting tools.
S&P Senior Financial Writer Vaughan Scully can be reached at Vaughan_scully@standardandpoors.com. Send him your ideas for mutual fund stories.