The stock market has delivered surprisingly great returns this year, and has been led in large part by small-cap stocks and the small-cap funds that invest in them.
Now that we are experiencing a market pullback, however, the sectors that have led the market are giving back some of those gains. This current weakness in the market may provide an attractive entry point for those looking to ride small caps higher when they eventually rebound.
For most investors, the best way to share in the rewards of small-cap investing is to let the right active management sort out the wheat from the chaff in this arena. T. Rowe Price (TROW) features two attractive small-cap funds:
T. Rowe Price New Horizons
T. Rowe Price New Horizons (PRNHX) is working very well in this market. Manager Henry Ellenbogen has been in charge of this small-cap fund for about three years and has produced fine results. PRNHX is up 29% year-to-date, doubling the S&P 500 and about 9 percentage points better than the Russell 2000. It also has advanced 15.5% annually during the past five years, placing it in the top 1% of all funds in its Morningstar category.
New Horizons has grown in size to $13.2 billion, which is huge for a small-cap fund. However, the portfolio has 43% of its holdings in mid-cap names, which no doubt makes it easier to handle the large asset size.
PRNHX is dedicated to growth names, and technology represents the largest sector weighting at 27% of the portfolio. Current top holdings include Catamaran (CTRX), FactSet (FDS), Gartner (IT), Lumber Liquidators (LL) and Netfiix (NFLX).
The mutual fund has a long-term view of these growth companies, so annual turnover is just 35%. The fund also sports a modest expense ratio of 0.8%, or $80 annually for each $10,000 invested.
T. Rowe Price Small Cap Value
As we all know, time touches all things — including portfolio managers. In 2014, Preston Athey will retire from his post at T. Rowe Price Small Cap Value (PRSVX) after leading the fund to roughly 11% annual gains in the past 15 years. He will turn over the fund to David Wagner, who has worked on the mutual fund since 2005. I would expect a smooth transition here and a continuation of the process that has made this fund a winner.
PRSVX, which has $9.2 billion in assets, blends small-cap growth names along with value stocks to provide solid results. The fund is up a solid 24% in the past year, though just 15% year-to-date. Meanwhile, it has advanced 8.5% annually in the past five years.
Current top holdings for the fund include 3D Systems (DDD), Aaron’s (AAN), Dorman Products (DORM), East West Bancorp (EWBC) and Genesee & Wyoming (GWR).
Turnover is minimal at just 5% annually, and PRSVX has an expense ratio of 0.82%.
Manager changes are always important, but other changes have gone well in the past at T. Rowe Price. I suspect this one will be just fine, too.
As of this writing, Bill Wysor did not hold a position in any of the aforementioned securities.