Source: North Jersey
Investing in smaller firms worked for some mutual fund investors
Thursday, January 13, 2011
The Record
By most measures, 2010 was a good year for investors. After a few anxious years the Standard & Poor's 500 Index generated a return of almost 13 percent.
But some mutual fund investors were rewarded with eyebrow-raising returns of more than 40 percent. The key strategy in their playbook? Going small.
The success of that approach stands out in a list of last year's top-performing stock funds. The largest returns among nine fund categories tracked by Morningstar Inc. are concentrated in those that specialize in stocks of small companies. And "small" is a relative term — it generally refers to companies valued at $2 billion or less.
The focus worked well for SouthernSun Small Cap (SSSFX), a $105 million fund that posted a 2010 return of more than 48 percent. That's because of a portfolio packed with small-to-moderate-sized industrial companies faring well as the economy begins to regain some traction. One example: The fund's top holding, Nordson Inc., an industrial equipment supplier, saw its shares jump nearly 49 percent.
SouthernSun's return was the largest among broadly based funds, rather than specialized funds, such as those that focus on specific sectors like technology or real estate.
Many of the other top funds on Morningstar's list tilt toward the smaller end of the stock spectrum.
Just two other funds finished 2010 with returns of greater than 40 percent. One was Integrity Williston Basin/Mid North America Stock (ICPAX), with a 47.4 percent gain. That fund holds many stocks of small companies that look for sources of energy in a region that encompasses eastern Montana, the Dakotas and the Canadian province of Saskatchewan.
The second was Hotchkis and Wiley Small Cap Value (HWSAX), up 43.3 percent. Its top five holdings include energy stocks Great Plains Energy Inc. and Stone Energy Corp.
Those three funds managed to race to returns that doubled, even tripled, the 2010 total return of the Standard & Poor's 500. Although there was a broad rally, it was uneven. The most glaring difference: Funds specializing in small-cap stocks gained an average 26 percent, compared with 13.6 percent return for large-cap funds, according to Lipper Inc.
In a typical year, small caps post returns that are around 5 percentage points higher than large-caps, according to Lipper analyst Tom Roseen. This year's gap was more than twice as big and extends a decade-long stretch when small caps have consistently performed better than bigger stocks.
In 2010, small caps began to surge late in the year when economic news began to turn more positive — a signal that an economic recovery was gaining momentum. Many small caps, especially the industrial companies that helped lift SouthernSun Small Cap, tend to be among the first to see their stock prices rise when the economy comes back. Larger stocks generally hold up better in market declines and can use their size to ride out recessions more easily.
But that often wasn't the case in the recent recession. One reason: The financial crisis hit stocks of large banks especially hard, which held back the large-cap category.
Whether the small-cap advantage still has legs depends in part on the direction of interest rates. Because they remain near historic lows, expect rates to rise as the economy strengthens.
Higher rates could hurt small-cap companies because they are more dependent on borrowing, Roseen says.
Mark Jewell is a columnist for The Associated Press. His column appears on Thursdays.
