Value investors like companies that are cheap, ugly and diseased. As shareholders go running from a stock, these investors start to get interested.
Many of the well-known value investing books point to a few common stock-picking traits: Start with small(ish) companies trading below their book value that have been spun off from a corporate parent or have gone through reorganization or have little analyst coverage. Then look to see if the market is undervaluing assets and earnings. If that’s the case, buy in and then wait for the market to discover them again.
There are three classes of value mutual funds we keep an eye on: large, mid and small. This week we are focusing on that last one. Morningstar tracks 502 funds in its small-cap value category. We searched for funds that charged below-average fees and expenses and sported track records that put them in the top 40% of their peer group over the trailing three- and five-year time periods. That left us with the 12 funds on the table below.
If you are unfamiliar with the value label, here is a quick explanation. Value stocks trade at a discount to the broad market (usually at a single-digit P/E). Their counterparts, growth stocks, trade at higher multiples because investors are willing to pay a premium for a possibility of higher returns. Studies have found that over the long run, value stocks tend to outperform the market and growth issues.
Typically, diversified portfolios may have a 10% to 20% exposure to small caps. This universe of stocks can be risky because it doesn’t enjoy the same access to capital or the economies of scale that bigger companies do. But remember this: Every big company has to start as a small one. At one point Microsoft (MSFT) wasn’t the giant it is today. If you own an index fund that tracks the Wilshire 5000, you will already have some exposure to small caps, so check your portfolio’s mix.
Even if you don’t buy in, checking out the portfolios of proven funds can be a revealing exercise. It can provide some insights into which companies or industries fund managers are anticipating to recover over the next few years.
The criteria: The funds on the table below are classified as small-cap value by Morningstar. They are open to new money, require a minimum investment under $5,000 and charge an annual expense ratio of less than 1.50%. In addition, the funds have track records that put them in the top half of that category. As usual, we did not include funds that charge sales loads.
| Fund | Ticker | Assets (In Millions) |
3-Year Average Annual Return (%) |
5-Year Average Annual Return (%) |
Expense Ratio (%) |
|---|---|---|---|---|---|
| Source: Morningstar Note: Data as of Feb. 18, 2010 |
|||||
| Allianz NFJ Small Cap Value | PNVDX | 6300 | -2.02 | 5.01 | 1.21 |
| American Beacon Small Cap Value | AASVX | 2400 | -5.29 | 1.95 | 0.59 |
| American Century Small Cap Value | ACSCX | 1800 | -1.41 | 4.48 | 1.5 |
| Columbia Small Cap Value | CSCZX | 1300 | -4.98 | 2.65 | 1.13 |
| Consulting Group Small Cap Value | TSVUX | 412.1 | -2.43 | 4.51 | 1.08 |
| Fidelity Small Cap Value | FCPVX | 1800 | -2.01 | 5.39 | 1.2 |
| Fifth Third Small Cap Value | FTVIX | 61.3 | -3.65 | 3.22 | 1.2 |
| Heartland Value Plus | HRVIX | 866.6 | 1.62 | 5.38 | 1.27 |
| Homestead Small Company Stock | HSCCX | 69.4 | -1.53 | 5 | 1.25 |
| Pinnacle Value | PVFIX | 60.9 | 1.83 | 6.09 | 1.49 |
| RiverSource Partners Small Cap | RSGLX | 395.7 | -3.35 | 3.41 | 1.01 |
| Royce Opportunity | RYOFX | 1700 | -5.45 | 2.71 | 1.34 |
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