3 Small-Cap Mutual Funds Primed for Growth

by Bill Wysor | December 19, 2013 10:26 am

The holiday season is a time of year during which many of us open up our hearts and homes and reconnect with friends and family. However, there’s quite a Scrooge-like attitude coming from the mutual fund world when it comes to investors looking for a way to play the sizzling small-cap class.

small-cap-mutual-funds-to-buyMany high-quality funds are closed to new investors. Fund favorites like Fidelity Small-Cap Discovery (FSCRX[1]), Fidelity Small-Cap Value (FCPVX[2]) and Artisan Small Cap (ARTSX[3]) are all off-limits to new investors. T. Rowe Price New Horizons (PRNHX[4]) will be closed to new investors effective Dec. 31. It’s a welcome problem — these funds’ assets have grown uncomfortably large thanks to both new money coming in and existing stocks being bid up in price.

Still, a few small-cap mutual funds are willing to greet new fund investors, and they’re very much worth considering. After all, mutual funds offer a smart way for investors to capture the potential explosive growth in small company stocks while avoiding the pitfalls of picking and monitoring these lesser-known names.

Here are three compelling no-load mutual funds that are open to new investors:

T. Rowe Price Diversified Small-Cap Growth (PRDSX)

mutual-funds-t-rowe-PRDSXT. Rowe Price Diversified Small-Cap Growth (PRDSX[5]) is simply not your average fund that uses a quantitative approach.

Manager Sudhir Nanda manages a fund that holds around 300 stocks and trades infrequently — turnover is just 15% annually. PRDSX also does not use a momentum-based strategy to pick holdings. Fundamental analysis is incorporated with quantitative (computer) models to determine the direction of the portfolio.

Currently, 22% of the fund is invested in technology names and 19% of the portfolio lies in the healthcare sector. Recent top holdings include 3D Systems (DDD[6]), Boston Beer Co. (SAM[7]), Incyte (INCY[8]), Maximus (MMS[9]) and Middleby (MIDD[10]).

The results are working on this $709 million fund — PRDSX is up 39.2% YTD, which places the fund in the top 23% of mutual funds in its Morningstar category. And during the past five years, this T. Rowe Price fund has advanced at an annualized 25.6% clip, which places it in the top 11% of all small-growth funds.

Expenses run a reasonable 0.91%, or $91 for every $10,000 invested.

American Century Small Company (ASQIX)

best-mutual-funds-to-buy-ASQIXAlso featuring a quantitative approach, American Century Small Company (ASQIX[11]) is moving in a positive direction.

Managers Brian Garbe and Tal Sansani have been on this $330 million fund since 2010, and fund performance has improved over the period. Year-to-date, ASQIX is up 38.4%, good enough to place it in the top 12% of mutual funds in its Morningstar category.

ASQIX mixes growth names in with value stocks for a blend that has worked quite well. Microcap stocks account for 33% of the fund, helping to add potential for explosive growth. Still, topping its 320 holdings are companies on the larger side of “small cap,” including EnerSys (ENS[12]), Questcor Pharmaceuticals (QCOR[13]), RLJ Lodging Trust (RLJ[14]), Euronet Worldwide (EEFT[15]) and Louisiana-Pacific (LPX[16]). None are weighted more than 0.72%, making this American Century fund a very balanced offering.

However, ASQIX does have a fairly high turnover ratio of 93%. Meanwhile, expenses run 0.88% annually.

Grandeur Peak Global Reach (GPROX)

mutual-funds-GPROXGrandeur Peak Global Reach (GPROX[17]) gives investors an opportunity to access a new fund with an experienced, successful stock-picking team focused on global small-cap opportunities.

Robert Gardiner and Blake Walker started their own firm after successfully picking small-cap stocks for Wasatch. However, Grandeur has the tendency to close its funds fairly early on as assets build. The now-closed Granduer Peak Global Opportunities (GPGOX[18]) is up a solid 33.9% YTD, ranking it in the top 6% of its Morningstar category.

But GPROX, which commenced operation in June, still is open for business, and it’s off to a fine start — the fund is up 5.7% during the past three months and 17% since inception, though it has just $56 million in assets. The plan is for this portfolio to eventually consist of 300 to 500 micro- and small-cap companies throughout the world.

Currently, 33% of the portfolio is invested in North America and 31% in Asia (ex-Japan). In terms of sector weighting, industrial names are 23% of the portfolio followed by 21% in the technology space. Recent top holdings include: Magellan Financial Group, Clinigen Group PLC, iMarketKorea, Hy-Lok and China Medical.

Expenses run an expensive 1.81%.

As of this writing, Bill Wysor was long FCPVX and GPGOX.

  1. FSCRX: http://studio-5.financialcontent.com/investplace/quote?Symbol=FSCRX
  2. FCPVX: http://studio-5.financialcontent.com/investplace/quote?Symbol=FCPVX
  3. ARTSX: http://studio-5.financialcontent.com/investplace/quote?Symbol=ARTSX
  4. PRNHX: http://studio-5.financialcontent.com/investplace/quote?Symbol=PRNHX
  5. PRDSX: http://studio-5.financialcontent.com/investplace/quote?Symbol=PRDSX
  6. DDD: http://studio-5.financialcontent.com/investplace/quote?Symbol=DDD
  7. SAM: http://studio-5.financialcontent.com/investplace/quote?Symbol=SAM
  8. INCY: http://studio-5.financialcontent.com/investplace/quote?Symbol=INCY
  9. MMS: http://studio-5.financialcontent.com/investplace/quote?Symbol=MMS
  10. MIDD: http://studio-5.financialcontent.com/investplace/quote?Symbol=MIDD
  11. ASQIX: http://studio-5.financialcontent.com/investplace/quote?Symbol=ASQIX
  12. ENS: http://studio-5.financialcontent.com/investplace/quote?Symbol=ENS
  13. QCOR: http://studio-5.financialcontent.com/investplace/quote?Symbol=QCOR
  14. RLJ: http://studio-5.financialcontent.com/investplace/quote?Symbol=RLJ
  15. EEFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=EEFT
  16. LPX: http://studio-5.financialcontent.com/investplace/quote?Symbol=LPX
  17. GPROX: http://studio-5.financialcontent.com/investplace/quote?Symbol=GPROX
  18. GPGOX: http://studio-5.financialcontent.com/investplace/quote?Symbol=GPGOX

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