Fund managers who bet on small U.S. business are having a tough time of it these days.
Take Don Hodges, whose Dallas-based firm, Hodges Capital, runs five mutual funds. Four of those funds—focused on the multi-cap, equity income, blue chip and contrarian asset classes—have taken the same bumpy ride that most stocks have taken this summer. (Indeed, Minyanville.com CEO Todd Harrison’s back-of-the-envelope math shows that the Dow Jones industrial average endured more than 10,000 points of intraday swings in the month of August alone.)
But like the rest of the small-cap class, his fifth fund, the Hodges Small Cap (HDPSX) fund has experienced an even wilder summer ride. Hodges (left) has no intention of giving up on HDPSX, though. In fact, he believes the fund, which numbers many U.S.-headquartered companies among its holdings, is in a great position for buying opportunities right now.
Morningstar data show that a $10,000 investment in Hodges Small Cap averaged yields of more than 10% in the spring of 2011, rising as high as $11,263. But by June, that same investment was lurching around, reaching highs above $14,850 and a low of $9,299. Worse, after the Standard & Poor’s credit downgrade of U.S. debt on Aug. 5, a $10,000 investment in HDPSX plummeted to a value as low as $8,224.
Considering that the fund also got slammed in 2008, just a year after its startup, Hodges is philosophical about the rollercoaster performance that is the small-cap stock market.
“We try to separate volatility from risk,” Hodges told AdvisorOne over a pre-hurricane lunch last Thursday at Delmonico’s restaurant, just steps from the New York Stock Exchange. “The best-performing stocks are volatile.”
Every year, Hodges Capital hosts an investment forum to introduce investors to a small group of favored companies. This year’s forum, scheduled for Wednesday, features former New York City Mayor Rudy Giuliani as keynote speaker along with 13 hand-picked presenting companies, all based in the United States, including agricultural equipment maker Alamo Group Inc., Devon Energy Corp. and Sally Beauty Holdings Inc.
A 50-plus-year market veteran (the grandfather of six began his investment career with Merrill Lynch, Pierce, Fenner and Smith in Oklahoma City in 1960), Hodges noted that he has witnessed recessions time and time again. And he has seen money come and go on Wall Street.
That said, he acknowledged that the small-cap space is an especially volatile one: Over the last three months, the Morningstar Small Cap index has fallen from a high of 5,449 to a low of 4,129, or nearly 25%.
So is that kind of loss worth the investment in stocks? According to investment strategist Ben Warwick of Aspen Partners, stocks are, over the long run, one of the best investments for protecting investors from inflation. “They are liquid, well regulated, and can provide important dividend income,” Warwick wrote in a recent column for AdvisorOne that explains his firm’s stock positions. “Clients would be hard pressed to meet their investment objectives without owning some stocks.”
Warwick is underweight on small caps, however. “Typically,” he writes, “small cap stocks tend to outperform large caps as rates head lower. But in our view, this additional return is not worth the much larger amount of volatility that small caps typically generate.”