Small-company stocks have had a good run as the U.S. economy slowly recovers from the Covid-triggered recession. That’s in the aggregate, though—many investors may be seeing a wide range of returns in their portfolios.
Year to date, returns of the nearly 600 small-cap funds have ranged from a 5% loss to a 65% gain. Active managers, though they often lag behind their benchmarks, have seen particularly strong performance this year: About two-thirds of small-cap active funds are outperforming, the highest rate since at least 2015, according to Bank of America strategist Jared Woodard.
Recoveries have historically been the best time for stockpickers, says Woodard, especially for the highly cyclical small-cap companies, which respond fastest to changes in the economy. “Managers are having an easier time making informed choices, while benchmarks cannot respond in such a dynamic way,” he told Barron’s. What’s more, despite the recent rally, small-caps remain cheaper than their larger peers. The discount further widened last month as the group experienced some pullback. Active managers can be more selective in terms of valuation.
Cyclical sectors like financials, energy, and industrials have been leading the small-cap market over the past few months, but still remain the most discounted group compared with large-cap counterparts. Barron’s picked a few active funds with more than 50% exposure to these sectors. Not surprisingly, these are mostly value funds, though with very distinct strategies.
The Avantis U.S. Small Cap Value exchange-traded fund (AVUV) is well diversified with nearly 600 holdings—companies trading at low valuations and with higher profitability ratios. Yet it’s actively managed, with the flexibility to make investment decisions based on price momentum, liquidity, and other criteria. The fund has returned 30% year to date, outperforming most peers in the category.
The Avantis ETF is run by Eduardo Repetto, a 17-year veteran from Dimensional Fund Advisors, known for its unique approach based on factors like size, value, momentum, and profitability. The ETF adopts a strategy similar to the $15 billion DFA US Small Cap Value fund (DFSVX), which has delivered great returns but is open only to advisors that have access to the Dimensional funds. The Avantis ETF offers a good alternative in a more tax-efficient wrapper and charges a lower fee, just 0.25%, versus DFA’s 0.39%. Launched in 2019, the Avantis ETF has already amassed nearly $1 billion in assets.
A more concentrated portfolio, the $3.5 billion Fidelity Small Cap Value fund (FCPVX) has fewer than 100 holdings, with the top 10 accounting for almost 20%, according to Morningstar. Signature Bank (SBNY) and Flagstar Bancorp (FBC) were its two top holdings at the end of January. It’s also one of the cheapest options among similar active mutual funds, charging 0.96%. The fund has returned 25% year to date, while the index-tracking, market-cap-weighted Vanguard Small-Cap Value ETF (VBR), charging 0.07%, gained just 19%.
J.P. Morgan’s (JPM) $7 billion Undiscovered Managers Behavioral Value fund (UBVAX) adopts an unusual approach that seeks to capitalize on behavioral biases that may cause the market to over- or underreact to information. The fund looks for cheap small-cap companies with significant insider buying or stock repurchases, believing that such moves are positive signals that a stock is oversold. It has returned 25% so far this year and has a competitive track record over the past 10 years.
Here’s to more big returns from small stocks.
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