Lately it seems that investors are anxiously awaiting a shift from small-cap stocks to the larger caps, and from value stocks to growth. Growth investing, particularly in the small-cap sector, has traditionally been considered a high-risk approach, yet in the past several years has proven to be rewarding.
After declining 5% in the first quarter of 2005, the small-cap growth sector rebounded in the second quarter (rising 3.64%), partly due to surging oil prices, which prompted investors to abandon large-cap industrial names and move into smaller, more specialized companies. Over the longer term, small-cap growth stocks are still outperforming their large-cap counterparts–the S&P Small-Cap 600/ BARRA Growth Index gained 15.27% (annualized) over the past three years through June 30, while the S&P 500 climbed 8.26%.
Among the best-performing small-cap growth funds is the $111 million Bridge-way Ultra-Small Company Fund (BRUSX), closed to new investors since December 2001. Portfolio manager John Montgomery invests in a diversified portfolio of micro-cap stocks (median market cap of $235 million). With a total of 97 holdings, more than half the portfolio’s assets are invested in consumer stocks.
Another top performer within the category, the $927 million FBR Small Cap Fund (FBRVX), has been closed to new investors since October 2004. Portfolio manager Chuck Akre can invest in companies up to $3 billion in cap size–the fund’s median market cap is about $1.3 billion. Akre focuses on undervalued companies, with proven management and excellent prospects for compounding their intrinsic value at high rates of return. Moreover, Akre isn’t afraid to make heavy bets on his favorite stocks–the top four holdings alone account for nearly one-third of the fund’s net assets, while the top 10 represent nearly half. Penn National Gaming (PENN), the number one issue, alone accounts for a whopping 12.3% weighting.–Angelina Dance