Fund analyst picks
3 unsung small-cap heroes
These worthy funds boast modest asset bases, seasoned managers, sound strategies and other charms.
By William Samuel Rocco, Morningstar
There's guarded but growing optimism about the U.S. stock market. The S&P 500 Index ($INX) returned 15% in the second quarter of 2003, while the tech-heavy Nasdaq Composite Index ($COMPX) gained 21%.
Meanwhile, the ongoing strength of consumer spending and home buying and mortgage refinancing should continue to support the economy. What's more, the recently enacted tax-reform package, which lowers rates on dividends as well as capital gains, and the late-June interest-rate cut should provide a further boost to the economy.
Thus, though few believe the torrid springtime rally can persist, many panelists at this year's Morningstar Investment Conference said they believe stocks will continue to trend upwards and are currently rather attractive investments.
Investors who share this optimism and are seeking to increase their exposure to U.S equities are likely to have small-cap funds on their radar screens. Small-growth, small-blend, and small-value offerings all gained about 20% in the second quarter, which put them right behind tech and communications funds and ahead of all other types of domestic-stock offerings. We're not sure if these funds will continue to thrive over the short to mid-term--their extended outperformance means that they're primed for a breather--but small-company exposure is essential to a well-rounded portfolio, and we believe that anyone who doesn't own a small-cap fund should consider dollar-cost averaging into one.
Our Analyst Picks are excellent starting points for investors seeking small-cap exposure, of course, but they certainly aren't the only good options. We've identified three relatively unknown small-cap funds that boast seasoned managers, sound strategies, and reasonable expenses in addition to strong long-term records. For complete lists, see the link at left under Related Sites.
Neuberger Berman Fasciano
Neuberger Berman Fasciano fund (NBFSX):
This small-growth fund is lagging this year, slowed by a light tech stake as well as some individual picks, but there's no arguing with its long-term record. While its typical peer has returned an average of 7.7% per year over the past decade, this fund has gained an annualized 10.3% per year during that period--and it has suffered significantly less volatility than the norm along the way. Michael Fasciano, who has run this fund since its late-1988 inception, has produced this fine record with a moderate and patient growth discipline. Finally, the 2001 sale of this fund to Neuberger Berman means that Fasciano now has an ample analyst staff at his disposal and that a repeat of 1999, when a huge cash stake stung the fund, is unlikely. All in all, we're surprised this offering still has only about $250 million in assets. (One caveat here is the potential takeover of Neuberger Berman (NEU, news, msgs) by Lehman Brothers (LEH, news, msgs) and the impact any such merger might have on the expenses or operation of this fund.)
Liberty Small Cap
Liberty Small Cap (SSCEX):
Peter Larson, who has run this small-blend offering since it opened in early 1993, follows a value-conscious approach and pays a lot of attention to sector and issue diversification, so it's no surprise that volatility is relatively limited here. And thanks to Larson's considerable stock-picking talents, the fund also boasts a 14% annualized return over the past 10 years (though it has posted only average results thus far in 2003). Pension plans and the like seem somewhat aware of Larson's abilities, but individual investors appear to be oblivious to his skills. Indeed, while the institutional share class of this fund has about $650 million in assets, this and the four other retail share classes of this offering have just $150 million in assets between them.
Delafield
Delafield (DEFIX):
This small-value offering isn't tame. Longtime managers Dennis Delafield and Vincent Sellecchia aren't afraid to build sizable positions in individual stocks and sectors as they search for beaten-up stocks with solid cash free cash flows and other catalysts for recovery. Accordingly, the fund has been more volatile than most of its rivals. But the two managers have put their focused discipline to good use. The fund has earned strong results in the first half of 2003 and in a variety of environments in the past, so it has outpaced its average peer by nearly two percentage points per year since opening in late 1993. High tax efficiency and a $165 million asset base, which enables Delafield and Sellecchia to be more nimble than most of their rivals, add to the fund's appeal.
(c) Copyright 2003. Morningstar, Inc. All rights reserved.
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