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A High-Quality, High-Conviction Small-Cap Fund

Bronze-rated Virtus Small-Cap Sustainable Growth maintains a tight portfolio of quality companies with strong growth prospects.

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The following is our latest Fund Analyst Report for Virtus Small-Cap Sustainable Growth Fund (PXSGX). Morningstar Premium Members have access to full analyst reports such as this for more than 1,000 of the largest and best mutual funds. Not a Premium Member? Gain full access to our analyst reports and advanced tools immediately when you try Morningstar Premium free for 14 days.

A disciplined management team has effectively used a quality-oriented investment process to produce superior results here, earning Virtus Small-Cap Sustainable Growth (which will be renamed Virtus KAR Small-Cap Growth in May 2017) a Morningstar Analyst Rating of Bronze.

Comanagers Todd Beiley and Jon Christensen have run the fund since 2008 and 2009, respectively, and have been on the investment team at subadvisor (and wholly owned Virtus subsidiary) Kayne Anderson Rudnick since the early 2000s. They also manage Bronze-rated  Virtus Small-Cap Core (PKSFX) in the same style. Alongside five team members, three of whom are dedicated to small- and mid-cap stocks, they seek out high-quality companies with strong growth prospects. Key tenets of their quality evaluation are a company’s ability to self-finance through strong cash flow generation, effective company management, and competitive differentiation. This process is also vital to the team’s overall risk management, as they attempt to own stocks with less business and balance sheet risk than peers.

The fund uses a high-conviction approach to get the most out of its stock picks. With an average position size of 3%, the roughly 30-stock fund tends to keep around half of its assets in its top 10 positions, and those don’t change too often. Indeed, the fund’s turnover has averaged near 30% over the past five years, much lower than the small-growth Morningstar Category average of 84%. The long-term focus, emphasis on high-quality companies, and strong stock-picking have delivered the best of both worlds. The fund has beaten peers and the Russell 2000 Growth Index since Beiley joined in early 2008, largely by adding alpha in down markets, but it has also participated in market rallies. The fund landed in the category’s top 3% or better over the trailing three-, five-, and seven-year periods ending March 2017. The fund also maintains an edge when accounting for risk, with superior Sharpe and Sortino ratios and Morningstar risk-adjusted returns.

The fund’s one drawback are its expenses, which are above average to high (depending on the share class) relative to other small-cap peers.

Christopher Franz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.