Posted on: Sunday, June 6, 2004
Smaller stock mutuals shine, too
By John Waggonner
USA Today
Anyone who drives a Hummer knows that being big isn't always best. The gas tank can be insatiable.
Size is rarely an advantage in a stock mutual fund. Some of the best could be compared to a Mini Cooper. But these tiny funds are worth a test drive.
Most of the mutual fund industry's assets are in a few huge funds. Lipper Analytical Services tracks 11,197 stock mutual funds, a figure that includes multiple share classes of the same fund. The 50 largest funds have 30 percent of the industry's $392 billion in assets. The 1,000 largest funds account for 80 percent of all the money in stock funds.
Big funds get that way because of good performance over a long time. The Vanguard 500 Index fund, the nation's largest stock fund, beat 77 percent of all funds in its Morningstar category the past 15 years. Fidelity Contrafund, the eighth-largest fund, beat 99 percent of its peers the same period.
Unfortunately, few big funds are able to keep beating the competition over time. One reason: All that money makes them sluggish.
Consider a fund with $10 billion in assets. The manager decides to put 1 percent of its assets in General Electric stock, selling for $31.25 a share. The fund will have to buy 3.2 million shares to make that 1 percent position. It could take several days, during which GE's price could move considerably.
A fund with $10 million in assets, however, would need to buy just 3,200 shares of GE to get a 1 percent position. It could take an hour.
But some small funds, while overlooked, have racked up huge records in relative obscurity. To find the top of the tiny, we looked for:
• Diversified U.S. stock funds with $350 million or less in assets.
• Five-year performance that beat 75 percent of their peers, and three-year performance that beat 50 percent of their peers.
• Positive alpha. Alpha is a measure of risk-adjusted return. Funds with positive alpha have higher returns than one would expect, given the risk they take.
Midcap stock funds
FPA Perennial, for example, is a conservative, bargain-hunting fund that invests in midcap stocks. The fund has 26 percent of its assets in money market securities because management is having trouble finding cheap stocks.
Honorable mention among midcap core funds: Heritage Mid Cap Stock, up 87 percent the past five years, and Mosaic Equity Mid-Cap, up 72 percent.
Large cap growth funds
Chase Growth fund was the top large-company growth fund. It's more aggressive than FPA Perennial, with big stakes in companies such as International Game Technology and Boston Scientific.
Still, the fund's 16.5 percent gain swamps the average 24 percent loss for large-company growth funds the past five years. A good second choice is Pioneer Papp America-Pacific Rim, which invests in U.S.-based companies with a significant Asia presence, up 8 percent.
WesMark Growth's 24 percent gain the past five years has clobbered most of its large-company core peer group. Other small large-cap core funds with big returns: Primary Trend, up 19 percent the past five years, and Buffalo Large Cap, up 6 percent.
Value funds
ICap Select Equity is a concentrated fund, which means that it keeps less than 30 stocks in its portfolio. It's a strategy that works well as long as all stocks do well. Apparently, they have. Another good bet among little small-cap value funds: Hennessy Cornerstone Value, up 14 percent the past five years.
SsgA Aggressive Equity's 86 percent gain the past five years puts it among the very best of all funds, but it has just $67 million in assets. For those wanting another small, aggressive fund, consider Quaker Aggressive Growth, up 83 percent.
Not all small funds are good. Tiny Ameritor fund, for example, is unsafe at any speed: It has managed to lose an average 9.8 percent a year every year for the past 15 years. But sometimes your investment ride can be much better in a small hot rod than a big cruiser.
