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.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
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).
-
Six Steps to Take if You've Recently Inherited Money From a Loved OneIt’s important to deal with the emotional aspect first before tackling the financial one.
-
Alaska Airlines to Buy Hawaiian: Get Bonus Miles Now
How to use the Alaska Airlines credit card and frequent flyer program to save on trips to Hawaii, Alaska and beyond.
-
6 Best Books on Investing
investing Those looking to build their wealth should consider these best books on investing.
-
Bond Basics: Zero-Coupon Bonds
investing These investments are attractive only to a select few. Find out if they're right for you.
-
Bond Basics: How to Reduce the Risks
investing Bonds have risks you won't find in other types of investments. Find out how to spot risky bonds and how to avoid them.
-
Bond Basics: How to Buy and Sell
bonds Bonds are complex. Learning about how to trade them is as important as why to trade them.
-
Bond Basics: U.S. Agency Bonds
investing These investments are close enough to government bonds in terms of safety, but make sure you're aware of the risks.
-
Bond Basics: What the Ratings Mean
investing Knowing the creditworthiness of your bond issuer can help limit the risk of default and maximize yield.
-
Bond Basics: U.S. Savings Bonds
investing U.S. savings bonds are a tax-advantaged way to save for higher education.
-
Bond Basics: Treasuries
investing Understand the different types of U.S. treasuries and how they work.
