So Far, So Good

While small-cap growth funds have excelled, it should be noted that these vehicles can often be volatile, concentrated in a few sectors, and feature high risk. For example, one of the top-performing small-cap growth portfolios for the quarter, the Kopp Emerging Growth Fund/A (KOPPX), which soared 19.8%, holds 53.3% and 42.1% in the information technology and health care sectors. Given the high risk associated with such holdings and their degree of concentration in the fund, the portfolio carries a standard deviation of 29.08 — versus peer average of 15.76 — and is ranked only 1 Star by Standard & Poor’s.

More diversified small-cap growth small-cap growth funds, with below-average volatility and expenses (and lower returns for the quarter) include Vanguard Small Cap Growth Index/Inv (VISGX) and USAA Mutual Fund:Capital Growth Fund (USCGX). Both funds are ranked 4 Stars by Standard & Poor’s and include large holdings in consumer discretionary, industrial, and energy stocks, and other sectors, as well as information technology and healthcare.

Meanwhile, large-cap stocks, particularly growth-oriented issues, have yet to begin their long-anticipated ascension. The average large-cap growth fund rose only 3.5% in the first quarter, making it the worst performer by style category. Large-cap value and blend funds gained 4.6% and 4.6% on average, respectively. Stovall chalks it up to the 2001 market meltdown, with burned investors hesitant to walk back into the flames. In addition, there’s the Wall Street adage: “Let your winners ride, and cut the losers short.”

With the S&P 500 Index having already achieved nearly half of its expected 9% gain for the full year, according to Standard & Poor’s estimates, the remaining months are not likely to proceed in a straight line, Stovall said.

Stovall believes that should there be a correction in prices this year, “it may occur during the typically sensitive third quarter, yet merely be a pause.” Overall, the U.S. domestic stock market has some positive tailwinds behind it, including healthy economic growth, benign core inflation trends, a mid-year end to the Federal Reserve’s rate-tightening policy and contained oil prices.

InvestmentAdvisor.com has more mutual fund news from Standard & Poor’s available here.