by Tom Taulli | June 14, 2013 2:15 am
Earlier this week, I looked at two big winners and two losers in the small-cap world. One thing that can’t be overlooked, though, is that investing in this space is fraught with risks.
For example, the return of small-cap stocks with market caps between $100 million to $1 billion was a dismal 3.5% loss so far in 2013.
Of course, there’s a way to help deal with this: invest in a fund.
By doing so, you get the benefits of expert portfolio management as well as diversification. The returns can also be attractive. Consider that — according to Morningstar.com — the average gain for small-cap funds is 8% for 2013.
With that in mind, let’s take a look at four small-cap funds to consider.
The T. Rowe Price New Horizons Fund (PRNHX) has a sterling long-term track record. But when a new manager — Henry Ellenbogen — came on board three years ago, there was some trepidation. As it turned out, though, there was nothing to worry about. During Ellenbogen’s tenure, he has racked up an annual average return of 23.6%.
A key part of his strategy has actually been to invest in pre-IPO companies. A prime example was Workday (WDAY), which has gained over 120% since its IPO in October 2012.
The portfolio is not chock-full of tech operators, though. Rather, Ellenbogen has taken an expansive approach and his investments have spanned diverse industries like consumer cyclicals, industrials, healthcare/biotechs and financial services. Some of the top holdings include Catamaran Corp. (CTRX), Clean Harbors (CLH) and Roper Industries (ROP).
If you want to take an index approach, one strong option is the Vanguard S&P Small-Cap 600 Growth Index ETF (VIOG). The average market cap is $1.5 billion and all the stocks are based in the U.S. There is also a strong bias towards tech companies, which make up about 22% of the portfolio.
Of course, a big advantage of the VIOG exchange-traded fund is the low cost. Consider that the expense ratio is a rock-bottom 0.2%.
In other words, this leaves more money for investors. Plus, over the past year, the return was an impressive 27.9%.
Emerging markets have been volatile lately. But when looking at the long-term, the growth opportunities still look attractive … and the Wasatch International Growth (WAIGX) fund looks for small caps in these markets.
The portfolio manager Roger Edgley has put together a strong track record over the past three years, with an average return of 19.6%, and he has done well navigating the recent swings. So far this year, the gain is a respectable 10.4%. Keep in mind that Rogers focuses on higher-quality companies, which helps to dampen some of the risks.
His portfolio currently has close to 20% in emerging markets. But Rogers is also a bull on Europe, where he has put 60% of the portfolio.
For many investors, the allure of small caps is the possibility of finding the next mega company. With that in mind, a tech fund can be a good way to play this.
But in today’s world, technology is quite diverse — including the Internet, mobile, biotech, cleantech and so on. Of course, that is actually the strength of the Ivy Science & Technology A Fund (WSTAX). It looks not just for the typical tech operators, but also those companies that are trailblazing healthcare.
The strategy has definitely been a winner. For the past three years, the average return was almost 19%, including a 36.3% climb for the past year.
Some of the top holdings include Aspen Technology (AZPN), Cree (CREE) and Alliance Data Systems (ADS).
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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