These Small-Cap Mutual Funds Have Outperformed In 2015

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These Small-Cap Mutual Funds Have Outperformed In 2015

Bob Ciura

|

Some small-cap–focused mutual funds have outperformed in 2015.
Growth investors tend to view small-cap stocks more attractively than large-cap stocks in a bull market. The reasoning is simple: when stocks are rallying, smaller companies with the potential for more rapid revenue and earnings growth typically outperform during times of economic expansion. However, the reverse is often true – namely, that small-cap stocks typically under-perform when global economic growth slows.

Small-cap stocks, as a whole, have not performed well so far in 2015. The Russell 2000 Index, a collection of 2000 small-cap stocks, is down 3.5% year-to-date through October 23. By comparison, the S&P 500 Index, which includes large-caps, was down approximately 1.5% through the same period.

Russell 2000 & S&P 500 YTD Price Returns (Daily)
Worries over slowing economic growth in the emerging markets have caused stock prices to stagnate this year, and that has naturally affected small-caps. However, there are some small-cap–focused mutual funds that have outperformed the Russell index and broader market this year.

Top-Performing Small-Cap Mutual Funds

Among the list of top-performing mutual funds, three in particular that may be interesting to investors are the Emerald Growth Fund Investor Class (FFGRX), the Oberweis Small-Cap Opportunities Fund (OBSOX) and the Wasatch Core Growth Fund (WGROX). These funds each have a modest required minimum investment of $2,500, which means they are available to most retail investors. And, all three funds maintain prolonged track records of strong returns.
Source: Yahoo Finance

The main reason these funds have performed so well despite a relatively poor climate for small-cap stocks in general is that they have opportunistically taken advantage of high-growth sectors of the economy. For example, these funds hold higher-than-average allocations to the health care and financial services sectors, which have seen rising growth over the past several years. The Emerald Growth Fund (FFGRX) allocates 22% of its assets to health care and another 15% to financial services. In fact, healthcare is the highest market sector allocation for the Oberweis Small-Cap Opportunities Fund (OBSOX), at 27%.

Consider Fund Costs

Investors should not solely look at total return when analyzing mutual fund performance. That is because fund expenses are an equally important component of a mutual fund’s total return. Mutual funds charge investors expenses, typically expressed as a percentage of an investment. Since expense ratios can vary among different funds, investors should consider a fund’s expenses before investing.

The three small-cap funds mentioned above have outperformed the Russell index, but the funds charge relatively high fees that directly detract from performance. But there are many solid small-cap mutual funds that do not charge such high fees. For example, one mutual fund that has performed well so far in 2015 and offers a more competitive expense ratio is the Fidelity Small Cap Growth Fund (FCPGX). This fund returned 3.4% to investors year-to-date through September 30. This fund charges a 0.9% annual expense ratio, which beats its peer category of 1.3%.

The Bottom Line

Investors looking for higher growth among mutual funds could consider small-cap mutual funds. Small-cap equities tend to outperform large-cap equities when markets are rising, due to their higher growth potential. This year, while the Russell 200 Index has not performed well, there are still small-cap–oriented funds that have generated above-average returns for investors.

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Some small-cap–focused mutual funds have outperformed in 2015.

These Small-Cap Mutual Funds Have Outperformed In 2015

Bob Ciura

|

Growth investors tend to view small-cap stocks more attractively than large-cap stocks in a bull market. The reasoning is simple: when stocks are rallying, smaller companies with the potential for more rapid revenue and earnings growth typically outperform during times of economic expansion. However, the reverse is often true – namely, that small-cap stocks typically under-perform when global economic growth slows.

Small-cap stocks, as a whole, have not performed well so far in 2015. The Russell 2000 Index, a collection of 2000 small-cap stocks, is down 3.5% year-to-date through October 23. By comparison, the S&P 500 Index, which includes large-caps, was down approximately 1.5% through the same period.

Russell 2000 & S&P 500 YTD Price Returns (Daily)
Worries over slowing economic growth in the emerging markets have caused stock prices to stagnate this year, and that has naturally affected small-caps. However, there are some small-cap–focused mutual funds that have outperformed the Russell index and broader market this year.

Top-Performing Small-Cap Mutual Funds

Among the list of top-performing mutual funds, three in particular that may be interesting to investors are the Emerald Growth Fund Investor Class (FFGRX), the Oberweis Small-Cap Opportunities Fund (OBSOX) and the Wasatch Core Growth Fund (WGROX). These funds each have a modest required minimum investment of $2,500, which means they are available to most retail investors. And, all three funds maintain prolonged track records of strong returns.
Source: Yahoo Finance

The main reason these funds have performed so well despite a relatively poor climate for small-cap stocks in general is that they have opportunistically taken advantage of high-growth sectors of the economy. For example, these funds hold higher-than-average allocations to the health care and financial services sectors, which have seen rising growth over the past several years. The Emerald Growth Fund (FFGRX) allocates 22% of its assets to health care and another 15% to financial services. In fact, healthcare is the highest market sector allocation for the Oberweis Small-Cap Opportunities Fund (OBSOX), at 27%.

Consider Fund Costs

Investors should not solely look at total return when analyzing mutual fund performance. That is because fund expenses are an equally important component of a mutual fund’s total return. Mutual funds charge investors expenses, typically expressed as a percentage of an investment. Since expense ratios can vary among different funds, investors should consider a fund’s expenses before investing.

The three small-cap funds mentioned above have outperformed the Russell index, but the funds charge relatively high fees that directly detract from performance. But there are many solid small-cap mutual funds that do not charge such high fees. For example, one mutual fund that has performed well so far in 2015 and offers a more competitive expense ratio is the Fidelity Small Cap Growth Fund (FCPGX). This fund returned 3.4% to investors year-to-date through September 30. This fund charges a 0.9% annual expense ratio, which beats its peer category of 1.3%.

The Bottom Line

Investors looking for higher growth among mutual funds could consider small-cap mutual funds. Small-cap equities tend to outperform large-cap equities when markets are rising, due to their higher growth potential. This year, while the Russell 200 Index has not performed well, there are still small-cap–oriented funds that have generated above-average returns for investors.

Sign up for Advisor Access

Receive email updates about best performers, news, CE accredited webcasts and more.

Popular Articles

Download our free report

Find out why $30 trillon is invested in mutual funds.

Why 30 trillion is invested in mutual funds book

Why 30 trillion is invested in mutual funds book

Download our free report

Find out why $30 trillon is invested in mutual funds.

Why 30 trillion is invested in mutual funds book

Download our free report

Find out why $30 trillon is invested in mutual funds.


Read Next