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Last week, S&P Capital IQ announced the finalists for its second annual U.S. Mutual Fund Excellence Awards Program. Thirty actively managed mutual funds made the cut in 10 asset-class categories. Next month, S&P will name the gold, silver, and bronze medal award-winners in each category. In this four-part series, we'll take a closer look at the finalists in some of the more popular asset class groups. Are your funds amongst the winners?
Middle of the road
In Part 1 and Part 2 of this series, we looked at S&P's award-winning large-cap and mid-cap funds. Today we turn our attention to the small-cap finalists. Small-cap stocks have certainly had the upper hand over their larger counterparts in the past decade, with the small-cap Russell 2000 Index posting more than twice the annualized return of the S&P 500 Index. Investors should realize small-caps won't always look this good, and odds are that larger stocks will have their day in the sun again. But long-term investors should definitely have a meaningful small-cap allocation, anywhere from 15% of your assets if you're more than a decade away from retirement to about 7%-8% if you're already retired.
S&P's three finalists in this category are Homestead Small Company Stock Fund (HSCSX), Janus Triton Fund (JATTX), and T. Rowe Price Small-Cap Stock Fund (OTCFX). All three funds fall roughly in the same expense range: The T. Rowe Fund is the cheapest at 0.92%, Janus Triton charges 1.00%, and the Homestead fund has a 1.18% expense ratio, according to Morningstar data. All funds fall far below the 1.49% that the average small-cap fund charges its investors.
T. Rowe Price Small-Cap Stock takes the cake for being the oldest kid on the block -- this fund dates all the way to 1956. And although the fund's current manager hasn't been on board quite that long, he has been at the fund for 19 years, a rarity in the business today. Homestead Small Company Fund has an inception date of March 1998, and two of the fund's three managers have been working on the fund since that beginning date. Janus Triton is the relative newcomer here, having started in early 2005 -- however, the fund's current management duo took over in July 2006.
All three funds have managed to put up impressive long-term track records. Since the Janus fund's inception in March 2005, Janus Triton has posted an annualized 10.5% return, Homestead Small Company Stock has gained 6.6%, and T. Rowe Price Small-Cap Stock measures in with a 5.6% return. Over the most recent 10-year period, the Homestead fund ranks in the top 7% of all small-value funds, while the T. Rowe Price fund ranks in the top 24% of all small-blend options.
The T. Rowe Price fund is by far the largest of the three funds, with roughly $7.3 billion in total assets -- a heavy load for a small-cap fund to bear. Janus Triton carries $2.2 billion in assets, while Homestead Small Company Stock clocks in with a mere $154 million. In addition, all of the fund candidates feature low annual turnover and fairly diversified portfolios, so there's not a lot of extra risk here.
Best in show
My pick for the gold medal winner in this category: Homestead Small Company Stock.
Once again, any three of these funds are solid small-cap picks, but I think Homestead has a slight edge here. Although the T. Rowe fund has been a solid performer, its asset base is beginning to get a bit unwieldy for a small-cap fund. If the fund doesn't close to new investors sometime soon, at some point it will begin to suffer from asset bloat and will start to look more like an index fund. And although the Janus fund has done well, its current management team has only a five-year history with the fund -- ideally, I'd like to see a bit more of an extended track record.
The Homestead fund has a long-standing investment process and management team, and its small waistline means that it can get into corners of the small-cap market that the other two funds can't. Furthermore, the fund has been a fairly consistent performer, holding its own in both up and down market environments. Reasonably priced industrial names are a prime attraction in the portfolio right now and include capital-goods maker Applied Industrial Technologies (NYSE: AIT ) , aerospace company Triumph Group (NYSE: TGI ) , and communications-equipment provider Belden (NYSE: BDC ) , all of which trade at trailing P/Es of less than 15. The fund also has a hefty allocation to more defensive consumer names such as Dean Foods (NYSE: DF ) and United Natural Foods (NYSE: UNR ) , which should cushion the fund well if another downturn materializes. Homestead Small Company Stock can definitely move out of step with the market from time to time, but over the long run, investors should do quite well with this fine small-cap choice.
Stay tuned for the final installment of this series, where we'll look at S&P's international-fund finalists to see which one should take home the gold.