Small-Cap Growth Funds: A Surfeit of Riches: Mutual Fund Focus, October 2009

To thin the list, we omitted all funds that are not accepting new shareholders and funds with assets of less than $20 million. From that group of roughly 100 funds, just seven carry Standard & Poor’s highest 5-Star rank, and of those seven, four stood out as particularly attractive. Two funds,Vanguard Small-Cap Growth Index (VISGX) and Wasatch Small Cap Growth (WAAEX), also ranked in the top 10 of small-cap growth funds in terms of assets under management, an important indicator of investor confidence and long-term success. Two other 5-Star funds–Janus Triton (JATTX) and TCW Small Cap Growth (TGSNX)–posted the best three-year returns of the entire group, indicating they performed well through a wide variety of market conditions.

Of these funds, only one, Vanguard Small-Cap Growth Index, is not actively managed. The Vanguard fund is passively managed to track the MSCI U.S. Small Cap Growth index, and carries a low expense ratio of just 0.28%. Its large size, $4.8 billion in assets as of August 31, allows it to hold almost 1,000 different stocks, about as much diversification as anyone could ask for. Its largest holding is biopharmaceutical company Human Genome Sciences (HGSI), which makes drugs to treat hepatitis and cancer, but accounts for less than 1% of the fund’s assets.

Wasatch Small Cap Growth is much smaller, with about $820 million in assets. It is actively managed and therefore has a higher expense ratio than Vanguard’s fund–1.2%–but that is still low compared with the 1.6% that most small-cap stock funds charge. The largest of Wasatch’s 86 holdings as of June 30 was MSCI (MXB), a New York-based index publisher and provider of investment decision support tools; it accounted for about 3% of the fund’s assets.

Janus Triton and TCW Small Cap Growth topped the list of funds for performance over the past three years, two of just a handful of funds that have a positive annual return over that period. Of the two, the Janus fund is larger, with $343 million in assets versus $187 million in the TCW fund. The Janus fund held 82 different stocks as of Aug. 31, with MSCI the top holding at 2.5% of the fund’s assets. The TCW fund owned 70 stocks, led by Mercadolibre (MELI), the “eBay of Latin America,” which accounts for 2.7% of the fund’s assets. Janus charges an expense ratio of about 1.2%, compared with 1.6% for the TCW fund.