A Fine Choice for Small-Cap Seekers
The Silver-rated fund applies a disciplined, relative value approach that emphasizes bottom-up stock-picking.
The following is our latest Fund Analyst Report for T. Rowe Price Small-Cap Value (PRSVX). 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.
T. Rowe Price Small-Cap Value boasts an impressive bench that has consistently applied a sound relative value approach that emphasizes bottom-up stock selection. The fund's three share classes earn a Morningstar Analyst Ratings of Silver.
Portfolio manager David Wagner is backed by an accomplished analyst bench. Wagner has led the strategy since June 2014 but had served as the strategy's associate manager under predecessor Preston Athey since 2005. He boasts an impressive 20 years of industry experience, 19 of which have come at T. Rowe Price. His long history with the firm means he is deeply familiar with the well-regarded analyst team, which numbers more than 100 analysts. Analysts are responsible for idea generation, and Wagner works closely with the team to identify attractive companies that fit the strategy's relative value criteria.
Wagner applies a disciplined, relative value approach that emphasizes bottom-up stock-picking. He keeps the portfolio sector-neutral relative to its Russell 2000 Value Index benchmark and emphasizes quality first while valuation is a secondary consideration. Its emphasis on quality over valuation contributes to this fund's placement in the small-blend Morningstar Category. The team's long-term focus also contributes to its blend style as it holds on to names that have moved from value to growth. Portfolio turnover has averaged just 22% under Wagner's watch, less than half its typical small-blend peer's average. Its long average holding period and diversified portfolio of roughly 300 stocks help it handle a sprawling asset base of over $10 billion. The fund remains open, and its large size has not slowed it down.
Since Wagner took the helm in June 2014 through December 2019, the fund consistently delivered strong results thanks to impressive stock picks across a variety of sectors and solid downside protection. The fund's no-load share class topped its average small-blend peer and the Russell 2000 Value Index benchmark in 100% of three-year rolling periods and we expect investors to continue to reap the benefits of this strong squad's deliberate approach.
Process | Above Average
Portfolio manager David Wagner applies a disciplined, relative value approach that emphasizes bottom-up stock-picking. He keeps the portfolio sector-neutral relative to its Russell 2000 Value Index benchmark and minimizes unintended factor bets. Its measured approach has consistently rewarded investors through strong stock picks, earning it an Above Average Process rating.
Wagner works with the analysts to identify high-quality businesses with defensible moats. Valuation is a secondary consideration. The team looks for companies trading at attractive relative valuations, but he is willing to pay up for higher-quality businesses and holds on to stocks that have appreciated, contributing to the strategy's small-blend style. The team looks for companies with sound fundamentals, a sustainable competitive advantage, and strong management teams. Meeting with company management teams is instrumental to his approach.
The team's long-term focus also contributes to its small-blend categorization as it holds on to names that have moved from value to growth. Portfolio turnover has averaged just 22% under Wagner's watch, less than half its typical small-blend peer's average. Its long holding period and large portfolio of roughly 300 stocks help it handle a sprawling asset base of over $10 billion. The fund remains open and we expect its measured approach to continue to reward investors.
Bottom-up security selection determines positioning in this diversified portfolio. The team hunts for stocks with market caps below $5 billion at the time of purchase but it will hold on to names that have run up if they continue to look attractive. As of September 2019, a handful of stocks, including West Pharmaceutical Services (WST) and Coupa Software (COUP), had increased to over $10 billion in market cap. As a result, the portfolio's average market cap of $2.2 billion was above the benchmark's $1.6 billion.
Wagner won't stray far from the sector allocations of the Russell 2000 Value Index but it's not an index-hugger. Active share relative to the Russell 2000 Value Index tends to be a respectable 85%. In addition to a handful of out-of-benchmark investments, the strategy can make industry-level bets, such as a 4% allocation to aerospace and defense versus the index's 0.8% position.
The portfolio looks mixed on valuation characteristics. For example, its average price/earnings and price/book ratios land below the typical peer's, while its average price/cash flow ratio ranks above its average rival. The portfolio looks more expensive when compared with its Russell 2000 Value Index benchmark, but it's higher-quality. It boasts higher returns on invested capital, returns on assets, and returns on equity when compared with its benchmark and a lower debt/capital ratio.
People | Above Average
The strategy is led by an experienced manager and is backed by T. Rowe Price's best-in-class research analyst team. It earns an Above Average People rating.
David Wagner has led the strategy since June 2014 but has been involved for longer. He served as the strategy's associate portfolio manager starting in 2005 under longtime manager Preston Athey until Athey's retirement in 2014. By the time Wagner became the lead manager in 2014, he had ample time to familiarize himself with the portfolio's holdings and the strategy's approach. Wagner boasts an impressive 20 years of industry experience, 19 of which were at T. Rowe Price.
Wagner sources ideas from T. Rowe Price's well-regarded analyst team, which numbers more than 100 and has a few analysts focused on small/mid-cap stocks. Idea generation is primarily driven by the analyst bench, and Wagner says he spends the bulk of his time working closely with analysts to pinpoint the most attractive companies to invest in. He also works closely with manager Frank Alonso of Bronze-rated T. Rowe Price Small-Cap Stock (OTCFX) and contributes to the investment advisory committee at Bronze-rated T. Rowe Price New Horizons (PRNHX). He makes full use of T. Rowe Price's resources, also collaborating with the fund's investment committee, quantitative analysts, and sector portfolio managers. An impressive array of resources sets this team apart.
Parent | High
T. Rowe Price remains best-in-class, earning a Positive Parent rating. The firm's success is rooted in its fundamental approach to active management and deep analyst bench. Investors benefit from managers' generally long tenures at the firm, well-planned manager transitions, reasonable costs, and attention to capacity. Many top executives, including CEO Bill Stromberg, rose from the analyst ranks, which helps keep a focus on investors at the forefront, even as the firm expands its distribution footprint outside the United States and bolsters its technology resources. The investment side has received resources, too. The multi-asset team has grown in size, reflecting its importance to the firm's future beyond the esteemed target-date lineup. Despite headwinds facing active managers, T. Rowe Price remains a powerhouse within U.S. and international equities. Fixed income is an area to watch. Several long-tenured managers have recently retired or will do so soon. Sound succession planning has smoothed the transitions, but the firm needs to ensure the bench remains deep. While high-yield and municipal bonds remain bright spots, the fixed-income team has not yet shown sustainable success in inching beyond its conservative bottom-up approach at some core strategies. Plus, the firm's foray into alternatives is unproven. Overall, though, T. Rowe Price retains the sensible and investor-focused culture that has long driven its success.
A strong record under portfolio manager David Wagner's tutelage has rewarded investors. From his June 2014 start through December 2019, the fund's no-load share class' 7.9% annualized return outpaced both its Russell 2000 Value Index benchmark and average small-blend category peer by 1.5 and 1.8 percentage points, respectively. It also topped its best-fit index, the Russell 2000 Index, albeit by less.
The strategy's strong results are a byproduct of consistent stock-picking and strong results in down markets. From June 2014 through December 2019, the no-load share class' downside-capture ratio relative to the Russell 2000 Index was an impressive 84%, while its upside capture was a solid 88%.
It has also been consistent. The fund topped its small-blend peers and the Russell 2000 Value Index benchmark in 100% of three-year rolling periods. Over the same time frame, it topped the more appropriate Russell 2000 Index in 84% of three-year rolling periods. It also landed in the best-performing quintile of the category over the trailing five-year period.
The strategy's diversified approach means that it tends to be less volatile than its typical peer, as seen by its below-average standard deviation. Under Wagner's watch, both its Sharpe and Sortino ratios have outpaced its bogies. Strong stock-picking continues to drive this strategy's success.
It's critical to evaluate expenses, as they come directly out of returns. The share class on this report levies a fee that ranks in its category's second-cheapest quintile. Based on our assessment of the fund's People, Process, and Parent Pillars in the context of these fees, we think this share class will be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Analyst Rating of Silver.
Linda Abu Mushrefova does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.