Baron Small Cap has struggled recently, but its long-term record is good. By Lawrence Carrel, Contributing Editor February 1, 2011 Every good fund is entitled to a bad year, and to be fair, the subpar performance in 2010 of Baron Small Cap (symbol BSCFX) was more of a disappointment than a calamity. The fund returned 23.5%, a good showing for most kinds of stock funds but well below last year’s 29.1% surge in the Russell 2000 Growth index, an appropriate benchmark for evaluating Small Cap’s performance. Baron also trailed the average gain of 27.0% last year for funds that invest in small, fast-growing companies.This isn’t immediate cause to give up on Baron Small Cap, but it has been five years since this member of the Kiplinger 25 has turned in results befitting the fund’s earlier excellence. If you go back to the fund’s 1997 launch, you’ll see that it still beats its benchmark by an average of more than six percentage points per year. For the past five years, though, it’s consistently been in the middle of its category, and last year it fell behind even that. Cliff Greenberg has managed the fund since its inception. One issue that explains the fund’s recent struggles but also its more-glorious long-term record is Greenberg’s affinity for for-profit education stocks. The sector contributed a great deal to the fund’s earlier success. But last year, investments in Strayer Education (STRA), Capella Education (CPLA) and American Public Education (APEI) hurt badly as the federal government began investigating the industry. Greenberg has held onto a smidgen of his holding in Capella and is keeping Strayer, which he believes will withstand the scrutiny, build out a national university system and recover strongly. “Right now the business is under severe pressure from the negative publicity, but I think Strayer will return to being a high-growth company,” Greenberg says. Greenberg also struggled with a couple of hybrid technology stocks -- namely, two real estate investment trusts that own data-center properties. In general, though, Baron Small Cap has lagged its peers because it takes a more-conservative approach than its competitors, says Greenberg. Many small-stock growth funds own more tech stocks than Baron, and tech has been soaring in this bull market. This approach makes Baron Small Cap look good in flat and down markets, but when tech is hot, the fund lags unless Greenberg can make more than his share of other brilliant stock picks. Advertisement Greenberg does look for strong growth, but in scattered places. His goal for any stock is to see it return at least 50% within two years of purchase. Some of his hopes include Fossil (FOSL), which makes watches for Armani and Burberry; SBA Communications (SBAC), which operates towers for the wireless telecommunications industry; and several cyber-security firms. Greenberg also believes more states will legalize or expand gambling to fight their budget problems. He says Penn National Gaming (PENN), the fund’s second-largest holding after SBA Communications, and slot machine maker WMS Industries (WMS) should capitalize. But with a massive $3.7 billion to manage, Greenberg needs to hit many more jackpots than he has in several years to restore this fund to the top of its class.