investing

Hodges Small Cap Fund Is Back on Track

After a few rough years, a small-cap fund rediscovers its mojo.

At last check, the team at Hodges Small Cap (HDPSX) had found only 48 stocks they liked well enough to own—but not for lack of looking. Because small-capitalization stocks (by the fund’s definition, those with market values of about $4 billion or less) don’t get as much coverage by Wall Street analysts as their large-cap cousins, finding gems requires a lot of legwork, says comanager Eric Marshall.

A true “blend” fund, the portfolio includes both fast-growing and undervalued companies. For the growers, the managers look for businesses they think can robustly boost earnings and cash flow over the next 12 to 18 months. Value picks are often under-the-radar firms whose stocks trade at a discount because the market misunderstands their business, says Marshall. Beyond growth or value themes, the managers favor firms able to boost prices for their products and services, and those in industries with little potential for new competitors to arise.

The fund opened for business just after the bear market commenced in 2007. Hodges surrendered 40.6% in 2008—seven percentage points worse than the Russell 2000, a small-cap benchmark. Amid the bludgeoning, the managers pared the portfolio from 50 to 35 stocks, and those that remained paid off. The fund’s 49% return in 2009 clobbered the Russell 2000 by 22 percentage points. Hodges beat at least 70% of small-cap blend funds in each of the next five years, as the fund gradually added more stocks to the portfolio.

The fund hit a rough patch from 2015 through 2017, when Hodges languished in the bottom 20% of funds in its category. Partly to blame, says Marshall, was the fund’s aversion to red-hot biotechnology stocks. They soared over that period but did not have enough earnings to qualify for the portfolio.

Hodges looks to be back on track. The managers bolstered top positions when the market pulled back earlier this year, adding to stakes in Eagle Materials along with cloud computing firm Nutanix, which has returned more than 75% this year through June 15. Over the past decade, the fund’s 10.6% annualized return beat the Russell 2000 by 0.4 percentage point per year. Hodges has beaten the index in six of the past 10 calendar years.

K8I-FUNDTRENDS_RANKINGS.indd
K8I-FUNDTRENDS_RANKINGS.indd

Getty Images

Most Popular

Where's My Stimulus Check? Use the IRS's "Get My Payment" Portal to Get an Answer
Coronavirus and Your Money

Where's My Stimulus Check? Use the IRS's "Get My Payment" Portal to Get an Answer

The IRS updated its popular online tool so that you can track the status of your second stimulus check.
January 9, 2021
How a Third Stimulus Check Could Differ From Your First and Second Payments
Coronavirus and Your Money

How a Third Stimulus Check Could Differ From Your First and Second Payments

There's going to be a big push for a third round of stimulus payments. But the amount and eligibility rules for your third stimulus check could be dif…
January 12, 2021
Biden Calls for $1,400 Payments as Part of $1.9 Trillion Relief Package
Coronavirus and Your Money

Biden Calls for $1,400 Payments as Part of $1.9 Trillion Relief Package

Under Biden's plan for a third stimulus check, the $600 second-round stimulus checks would be increased to $2,000.
January 14, 2021

Recommended

The 11 Best Vanguard Funds for 2021
mutual funds

The 11 Best Vanguard Funds for 2021

It'd be easy to put together a full 2021 gameplan using nothing but a mix of the best Vanguard funds. Here are 11 that stand out for the year to come.
January 7, 2021
2021's Best Mutual Funds in 401(k) Retirement Plans
mutual funds

2021's Best Mutual Funds in 401(k) Retirement Plans

A key to smart saving for retirement: spreading your portfolio across a few of the best mutual funds in your 401(k) plan. Here, we profile the top opt…
December 29, 2020
The Best Fidelity Funds for 401(k) Retirement Savers
Investing for Income

The Best Fidelity Funds for 401(k) Retirement Savers

Fidelity funds are renowned for their managers' stock-picking prowess. We rate Fidelity's best actively managed funds that are popular in 401(k) plans…
December 28, 2020
The Best American Funds for 401(k) Retirement Savers
mutual funds

The Best American Funds for 401(k) Retirement Savers

American Funds has 14 actively managed mutual funds among the 100 most popular 401(k) offerings. We look at the Best American Funds in that group, and…
December 28, 2020