by Tom Taulli | May 2, 2011 8:21 am
Last week, the Russell 2000 index — which covers small cap stocks — hit an all-time high. Since the March 2009 low, the index is now 150% higher. It’s clear that investors are looking for growth, despite the risks. After all, there has been an explosion of new technologies like the cloud, big data, social networking, storage and so on. Of course, it’s often the case that the leaders in such emerging areas are smaller companies.
Yet it can be tough to spot the good candidates. It often requires understanding complex technologies and new trends. But there are a variety of top mutual funds that can help out. Let’s take a look at five standouts:
When it comes to small cap funds, it is usually optimal to have smaller asset bases. The reason is that it can be tough to take a large position in a small cap company, since it can actually drive up the price.
But some funds have found ways to deal with this problem. A prime example is the Vanguard Small Cap Growth Index (MUTF: VISGX[1]), which has $9.3 billion in assets.
It helps that the fund is based on a fairly liquid MSCI US Small Cap Growth Index. Because of this approach, the expense ratio is only 0.26%. This is a key advantage since it’s often the case that small cap funds have larger ratios, which can eat into returns.
Top holdings include Informatica (NASDAQ: INFA[2]), Verifone (NYSE: PAY[3]) and JDS Uniphase (NASDAQ: JDSU[4]).
T. Rowe Price New Horizons (MUTF: PRNHX[5]) fund is also a biggie in the small caps space. It has about $8.6 billion under management. Then again, the fund has been around for 50 years.
With such a background, the management team certainly understands that the big money in small caps often means holding onto stocks for the long haul (it has worked for investors like Warren Buffett, right?) For example, the turnover is a reasonable 46.1%.
So it should be no surprise that the fund will invest in recent IPOs. In fact, this market has been perking-up lately — and can provide some near-time gains for the portfolio.
Currently, the fund’s top holdings include Henry Schein (NASDAQ: HSIC[6]), FMC Technologies (NYSE: FTI[7]), O’Reilly Automotive (NASDAQ: ORLY[8]) and Panera Bread (NASDAQ: PNRA[9]).
When an industry is undergoing a secular trend, it often means that many companies will benefit. That is, individual stock analysis may not necessarily be critical.
Thus, in the case of the Columbia Small Cap Growth I (MUTF: CGOAX[10]) fund, the portfolio managers take a tops-down approach when putting together the portfolio. And it has meant strong results.
Last year, the fund generated a nice return of 30.16%. Actually, so far in 2011, the gain is 14.83%.
Since 2000, John Mullman has managed the Prudential Jennison Small Company A fund (MUTF: PGOAX[11]), which has $2.8 billion in assets. He tries to avoid the high-fliers. Instead, Mullman prefers those companies that have sustainable growth. This should help produce stronger returns as well as lower the volatility. Over the past decade, the average annual return was 9.68%.
Mullman also invests in broad industry categories, like financial services, industrials, healthcare and even real estate. The top holdings include SBA Communications (NASDAQ: SBAC[12]), Concho Resources (NYSE: CXO[13]), Protective Life (NYSE: PL[14]) and Power Integrations (NASDAQ: POWI[15]).
Tom Taulli’s latest book is “All About Short Selling[16]” and his Twitter account is @ttaulli[17]. He does not own a position in any of the stocks named here.
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