April 28, 2003 — Amid the deep bear market the last three years, small-cap value funds have been a bright spot. Faced with widespread losses, many investors may not realize that they rose 2% annualized for the three years through last month, and that mid-cap value funds were up a modest 0.8%. These gains may not be spectacular, but they’re a big improvement over the 13.1% annualized loss for the average domestic-equity fund for the three years through March.
The outperformance of small-cap value funds also shows up among the best-performing U.S. stock funds for the last three years. Small-cap value funds made up six of the ten best-performing domestic-equity funds for the three years through last month. The remaining four funds were also smaller-cap, income-oriented offerings in the small-cap blend, mid-cap blend, and mid-cap value categories.
Although there were differences, these ten leading funds generally shared some similar features. Most had long-standing managers, who consistently followed their respective investment styles. While this may have hurt the funds during the 1990s, when growth shares surged, such steadfastness helped in the past three years as the funds’ style categories outperformed. As tracked by Standard & Poor’s, six of the ten funds had low style drift over the past three years, and four had moderate style drift.
The ten funds may also have benefited from more moderate volatility. Most of the ten had standard deviations — a measure of volatility — below or near that of their respective style peers. CGM Focus Fund (CGMFX) had a high standard deviation of 37.5%, but the fund’s returns were also outsized: 20.7% for the three-year period through last month. However, as the stats suggest, the portfolio swings wide: It gained 47.7% in 2001, but lost 18.8% in 2002. For the one-year period ended last month, CGM Focus was down 30.9%.