Kip 25

T. Rowe Price Small-Cap Value Takes the Long View

This fund's managers look for high-quality stocks that have stumbled or troubled companies with a fix in sight.

Just the hint of tax cuts saved small-capitalization stocks from what might have been a ho-hum 2017. The stocks’ returns were underwhelming until the prospect of lower corporate taxes arrived in August. Since then, small-cap stocks have rallied, helping T. Rowe Price Small-Cap Value (symbol PRSVX, a member of the Kiplinger 25, our favorite low-fee funds, deliver an 11.6% gain over the past 12 months through December 8. That bests the small-company Russell 2000 index, and it surpasses 75% of its peers—funds that invest in inexpensive small-company stocks. (Large-cap stocks, up 20.5% over the past year, are still ahead.)

Fund manager David Wagner favors bargain-priced businesses with long-term growth potential. The combination isn’t easy to find. “If the stock is cheap, there’s a good reason,” says Wagner. “And if it’s a great, growing company, the stock is expensive.”

Wagner homes in on high-quality stocks that have stumbled temporarily or troubled companies with a catalyst to turn things around. And once he buys, he typically holds for the long term. The fund’s 22% turnover rate implies a typical holding period close to five years. By contrast, the average small-company stock fund has a 74% turnover rate, or a holding period of less than two years. (For more on stock market bargains, see 7 Bargain Stocks in Today's Pricey Market.)

Some of Wagner’s picks take time to pay off. He scooped up shares in Green Dot, best known for its prepaid debit cards, in 2014 at prices ranging from $18 to $20. At the time, increased competition had crimped earnings. “We made no money on the stock for more than a year,” he says. After an activist investor stirred things up, the firm acquired competitors and renegotiated a key distribution contract. Earnings are back on track, and over the past year, Green Dot shares climbed 143% and recently traded at $61.

Then there’s Littelfuse, a maker of small electrical fuses for cars, which has been in the fund for 20 years. Demand for its products “exploded” recently, says Wagner, and the stock rose 28.6% over the past year.

After a rough 2015, the fund has been hot. Since Wagner took over in mid 2014, his 9.3% annualized return outpaced the 8.8% gain of the Russell 2000 index.

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