Small-Cap Diamonds in the Rough
Our Premium Fund Screener uncovers hidden gems.
Since July 2001, Morningstar's FundInvestor newsletter has included a feature called Hidden Gems, a series of articles designed to highlight funds with strong track records and relatively small asset bases. Unsurprisingly, this feature is among the newsletter's more-popular articles. After all, who wouldn't want to own a hidden gem?
That raises an interesting conundrum, of course: Why, exactly, would a solid offering have trouble attracting assets? Don't investors tend to flock to the funds with the best track records?
Well, not exactly.
Why So Small?
Sometimes a relatively low level of assets is the result of poor or inadequate marketing by a fund company. Simply put, investors can't invest in a fund if they don't know it exists.
Other times, though, a shop will actually strive to keep a fund's asset base fairly small because that gives the manager a leg up when it comes to staking out a meaningful position in a name and, if she's so inclined, trading quickly in and out of it without moving the stock's price.
The advantage of a svelte asset base is most apparent in funds that invest primarily in small-cap stocks, whose trading volumes tend to be much lighter than those of their bigger-cap brethren. Indeed, N/I Numeric Investors Small Cap Value (NISVX), a successful small-value offering, likes to close its doors to new investors whenever assets under management approach $160 million. Compared with the typical small-value fund--which clocked in with an asset base of $236 million at the end of February 2003--that's relatively small potatoes.
This week, we'll use Morningstar's Premium Fund Screener to ferret out no-load hidden gems that specialize in small-cap stocks. (If you're interested in larger-cap funds, just choose the Morningstar preset screen for hidden gems, which you can tweak to your heart's content.)We'll screen out funds with net assets greater than $200 million and also include criteria that homes in on just those offerings that have strong track records of delivering peer-besting returns over time.
Moreover, because many of these funds aren't that well-known, we'll also screen for the ones that Morningstar analysts have written about. That should help jump-start your own research, but if you want to cast a wider net, you may want to eliminate that particular filter.
Finally, as always, we'll screen for distinct portfolios, ensure that the fund is open to new investment, and, even though funds with small asset bases tend to cost more than bigger offerings, we'll also look for those with below-average expense ratios. A hefty price tag, after all, would take much of the shine off that gem.
Click here to run this screen yourself.
As of March 21, a whopping 11 funds make it through our exacting criteria. Depending on your goals and risk tolerance, of course, the screen may be more stringent than you need. If so, just adjust the criteria by using the Change, Insert, and Remove links to the right of the filters.
And good luck finding that diamond in the rough.