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Portfolio > Mutual Funds > Equity Funds

Small-Cap Value Funds: Bear Market Champs

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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%.

Another benefit to the ten funds is their small size. None of the ten funds, as tracked by Standard & Poor’s, had more than $400 million in total net assets under management as of February 28. That helps in smaller-cap investing, where liquidity can be limited. A smaller asset base helps to insure that the manager can stick to his investment strategy of buying small attractive issues. Once a fund becomes too large, a manager might not be able to purchase enough shares of a smaller stock for its shareholders, possibly jeopardizing the fund’s mandate.

Ten Best-Performing Domestic-Equity Funds for Three Years Through March 31, 2003

Inv StyleStyle DriftStand Dev (%)3-Yr Anlzd Rtrn Through 3/31/03 (%)1-Yr Rtrs Through 3/31/03 (%)

  • Schroder Capital Ultra Fund/Inv (SMCFX) Small-Cap BlendLow18.2%+47.0%-7.6%
  • CGM Focus Fund (CGMFX) Small-Cap ValueModerate37.5%+20.7%-30.9%
  • NI Numeric Investors Small Cap Value Fund (NISVX) Small-Cap ValueLow15.9%+19.0%-15.1%
  • Hotchkis & Wiley Small Cap Value Fund/I (HWSIX) Small-Cap ValueLow18.6%+17.1%-12.3%
  • Royce Fund Special Equity (RYSEX) Small-Cap ValueLow13.5%+16.8%-4.1%
  • Boston Partners Small Cap Value II/Instl (BPSIX) Small-Cap ValueLow21.4%+15.9%-25.4%
  • Yacktman Fund (YACKX) Mid-Cap BlendModerate15.8%+15.9%-0.5%
  • RS Investment Trust: Partners Fund/A (RSPFX) Mid-Cap ValueLow19.1%+15.4%-4.2%
  • Aegis Value Fund (AVALX) Small-Cap ValueLow13.9%+14.9%-9.3%
  • Yacktman Focused Fund (YAFFX) Mid-Cap BlendLow16.3%+14.5%+1.9%

Inv StyleStand Dev (%)3-Yr Anlzd Rtrns Through 3/31/03 (%)1-Year Rtrns Through 3/31/03 (%)

  • Small-Cap Value18.7%+2.0%-23.1%
  • Small-Cap Blend21.5%-6.9%-25.9%
  • Small-Cap Growth31.3%-23.1%-30.5%
  • Mid-Cap Value17.2%+0.8%-21.9%
  • Mid-Cap Blend19.8%-7.1%-23.0%
  • Mid-Cap Growth27.3%-22.6%-26.4%
  • Large-Cap Value16.4%-7.9%-25.2%
  • Large-Cap Blend17.9%-16.6%-25.4%
  • Large-Cap Growth22.2%-23.1%-26.8%
  • Domestic Equity Funds20.4%-13.1%-23.7%
  • S&P 50017.6%-16.1%-24.8%

Source: Standard & Poor’s. Total returns include reinvested dividends. Data as of 3/31/03.


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