Becoming an Investor

Time for Small Companies to Shine

The environment is right for investing in small companies. These five managers divide and conquer the small-cap market.

Now is proving to be a “super-exciting time to be investing in small companies,” says Shadman Riaz, a comanager of Fidelity Stock Selector Small Cap (symbol FDSCX). A growing economy and higher interest rates make a good environment for small-capitalization stocks. What’s more, a rush of initial public offerings means there are more under-the-radar companies on the market—and thanks in part to the popularity of indexing, fewer analysts who research them, says Riaz. All told, “there’s an opportunity for active managers to outperform,” he says.

Stock Selector Small Cap has a unique setup. Five managers run the fund, but the portfolio is divided into three different sleeves, managed separately. Two parts hold a diversified mix of stocks across many sectors. One of those favors growing, high-quality firms; the other tilts toward so-called cyclical, or economy-sensitive, value-oriented opportunities. The third sleeve focuses only on health care stocks.

The managers collaborate, but they don’t work by consensus. “We make individual decisions,” says Riaz. However, they all look for businesses with a compet­itive edge, run by smart executives, that trade at a discount to the managers’ estimate of fair value.  

Table giving stats regarding small-company blend funds

Kiplinger graphic

No matter where they fit in the overall portfolio, stocks in the fund typically meet one of three sets of criteria. Some companies are steady businesses with strong competitive niches, pristine balance sheets and reasonable valuations. Business services provider ExlService Holdings is “growing at a good clip and has good cash flow,” says Riaz. Others are innovative companies with in-demand products. SiTime, for example, makes timing devices embedded in gadgets such as earbuds and smartphones to help them sync quickly. The third group includes out-of-favor cyclicals. Oil refinery HollyFrontier, for instance, has been trading at a low price relative to book value (assets minus liabilities), says Riaz.

The portfolio structure has delivered good results. Over the past three years, the fund’s 18.6% annualized return outpaced 97% of its small-blend peers (funds that invest in small companies with either a growth or value tilt).

Table with stats on 20 largest stock and bond mutual funds

Most Popular

An Easy Way to Find How Much You Will Spend in Retirement
retirement planning

An Easy Way to Find How Much You Will Spend in Retirement

One simple math equation can help you determine where to start building your retirement income plan, and whether your money should last.
June 27, 2022
Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
8 Money Tips for Seniors Suffering from Inflation
Inflation

8 Money Tips for Seniors Suffering from Inflation

This year has been an especially tough one for seniors on fixed incomes. To stay on track, try these eight financial survival tips.
June 26, 2022

Recommended

Stock Market Today (6/29/22): Markets Steady, But Bed Bath, Cruise Lines Tumble
Stock Market Today

Stock Market Today (6/29/22): Markets Steady, But Bed Bath, Cruise Lines Tumble

The calmest market day of 2022 wasn't nearly so pleasant for a few individual stocks, including retailer BBBY and cruise operator CCL.
June 29, 2022
Stock Market Today (6/28/22): Weak Data Opens Trap Door Under Stocks
Stock Market Today

Stock Market Today (6/28/22): Weak Data Opens Trap Door Under Stocks

Slack in manufacturing data and low consumer confidence tanked early-session optimism and left the major indexes with deep losses Tuesday.
June 28, 2022
Stock Market Today (6/27/22): Stocks Limp Out of the Starting Gate
Stock Market Today

Stock Market Today (6/27/22): Stocks Limp Out of the Starting Gate

Monday's session saw stocks give back a little territory from last week's rebound rally, but experts are seeing a few reasons to be optimistic.
June 27, 2022
5 Best Dow Dividend Stocks to Buy Now
blue chip stocks

5 Best Dow Dividend Stocks to Buy Now

This mini-portfolio of blue-chip dividend payers is well-positioned to both generate income and hold up to headwinds for the rest of 2022.
June 27, 2022