The average small-cap fund gained a thumping 23.1% for the one-year period ended Aug. 31, 18.9% annualized for the three-year period, and 19.3% for the five-year period. Small-cap dominance shows up in index returns. The S&P SmallCap 600 outperformed the S&P 500 for the one-year period ending in August, soaring 26.5% vs. 12.6% for the S&P 500. For the three- and five-year periods, the SmallCap 600 rose an annualized 21.3% and 10.2%, respectively, vs. 12% and a loss of 2.7% for the S&P 500.
Thanks to small-cap funds' strong performance over the past five years, investors are still seeking to tap into these popular little treasures, only to find small pickings left. According to Financial Research Corp., investors poured $3.6 billion into small-cap funds during the month of July, 2005, alone, bringing total assets for the category to more than $419 billion.
SAFEGUARDING THE STRATEGY. Year-to-date, 43 new small-cap fund share classes have been launched because of high demand, while 24 have been closed to new investors. That brings the total number of small-cap fund share classes now closed to 179.
Most often, fund companies close small-cap funds to new investors when assets become too large or rise too fast, and the portfolio becomes too big to manage. This is done to maintain the fund's investment strategy and protect existing shareholders from potential decreases in performance and style impurity.
For example, a fund manager with too much cash to put to work may not be able to buy enough shares of more thinly traded smaller-cap issues, making it difficult to execute the strategy. If the manager has to buy larger companies to invest excess cash, it can hinder the fund's strategy and distort asset allocation plans for shareholders.
OPEN FOR BUSINESS? Asset managers can opt to close their funds in two ways: A soft close allows existing shareholders to continue to invest, while investors who do not already own shares in the fund are not allowed to make purchases. A hard close, which occurs less often, prevents the fund from accepting assets from both new and existing investors.
In some cases, the prospectus specifies that a fund will close after reaching a predetermined level of assets. While small-cap funds with over $1 billion in assets are generally thought of as "large," some small-cap funds, such as Fidelity Low Priced Stock (FLPSX
), hold much more. This $37 billion portfolio closed to new investors at the end of 2003.
Funds may also close and reopen to investors multiple times as their boards see fit. For example, the Wasatch Funds: Micro Cap Fund (WMICX
) has closed six times since its inception in 1995.
CHART-TOPPING FUNDS. According to a statement issued on the company's Web site, Wasatch Advisors "periodically" closes certain funds to control asset levels: "We feel this is an important strategy for the Wasatch Equity Funds, most of which invest in smaller companies, and feel this protects the interests of our shareholders even though not closing them might be better for our top line."
Standard & Poor's Fund Advisor screened the entire universe of small-cap funds, consisting of over 1,500 share classes, in search of those with the highest three-year annualized returns that are still accepting new shareholders (as of Sept. 27).
First on the list is ProFunds:UltraSmall Cap/Inv (UAPIX
). The fund provides leveraged exposure to the Russell 2000 by seeking daily investment results before fees and expenses that correspond to twice (200%) the daily performance of the index.
Although the fund has the highest three-year annualized return as of Aug. 31, rising 34.8%, it has shed 1.7% over the past five years. Also, given that the fund is twice as volatile as its peers because of its strategy, it receives only a 2-Star rank. Standard & Poor's Star rankings are risk adjusted, taking into account both performance and volatility. Despite putting up higher returns, a fund with higher than average risk (standard deviation) is penalized.
GUIDING PRINCIPLES. Second is the $219 million Royce Fund Value Plus Fund/Inv (RYVPX
), also open to all investors. It registered an average annualized return of 33.7% for the three-year period ended Aug. 31. At the end of August the fund's largest sectors were technology (16.7% of assets); industrial products (15.7%), health care, (15.5%), and natural resources (14.8%).
Co-managers W. Whitney George and James A. "Chip" Skinner III stipulate that a company's stock should be undervalued, that an outfit has to be growing or must be poised to turn into a growth company in a short period of time, and that Wall Street should not have yet discovered it. Standard & Poor's has assigned a 5-Star ranking to Royce Value Plus fund as a result of its excellent risk-adjusted returns.
Here's a list of the five top-performing small-cap funds sorted by three-year annualized returns that are currently open to new investors.
3-Year Annualized Return (%)
S&P Star Rank
Expense Ratio (%)
ProFunds:UltraSmall Cap/Inv (UAPIX)
Royce Fund Value Plus Fund/Inv (RYVPX)
Royce Fund Value/Inv (RYVFX)
Pacific Advisors:Small Cap Fund/A (PASMX)
Oberweis Funds:Micro-Cap Portfolio (OBMCX)
Dance is an analyst for Standard & Poor's Fund Advisor