Kip 25

Our Small-Cap Funds Take Different Paths

Not all pockets of the small-cap world have fared well recently, with value-priced stocks the biggest winners.

Small-company stocks typically lead the market coming out of a recession. This time was no different. The rally has flatlined since spring, however, and as the returns of the Kiplinger 25's small-cap stock funds show, not all pockets of the small-company world fared well.

Value-priced stocks were the biggest winners. American Century Small Cap Value (ASVIX) gained 71% over the past 12 months, ahead of the 47% return in the Russell 2000 small-company index. Now swollen with nearly $6 billion in assets, the fund is closing to new investors. Existing shareholders should stay put. But we will find a replacement for it in the Kip 25 next month.

Low-quality small stocks did better than their high-quality counterparts. That kept a lid on gains in our other two small-cap funds, because both favor good businesses. Over the past 12 months, T. Rowe Price Small-Cap Value (PRSVX) gained 49%; T. Rowe Price QM US Small-Cap Growth Equity (PRDSX) rose 30%.

T. Rowe Price Small-Cap Value manager Dave Wagner likes a bargain, but he'll pay up for high-quality companies. That gives the portfolio both value and growth traits. Last year, Wagner dialed up the focus on value, scooping up beaten-down economically sensitive stocks amid the COVID sell-off, including energy and bank shares. Those investments surged "quickly and in a big way" last fall, says Wagner, helping the fund's one-year return.

T. Rowe Price QM US Small-Cap Growth Equity manager Sudhir Nanda uses computer models to find reasonably priced growing companies with steady earnings and revenues. That posed a headwind in last year’s market. "Everything that we like has done poorly, and everything that we don’t like has done well," says Nanda.

It's typical for both funds to lag in big up markets. But over the long haul, both funds have delivered solid returns that beat their respective benchmarks. Looking ahead, says Wagner, small-cap stocks are "decently valued, and the outlook is largely good."

In other news: Vanguard Wellington is officially open to all investors. Up to now, new investors had to buy shares directly from Vanguard.

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