Non-Ret: Small Cap Value

My Pick: STSCX Stratton Small Cap Value Fund

So far our hypothetical portfolio has a Mid Cap and a Large Cap fund but no Small Cap coverage and we have a Blend and a Growth fund but no Value so the next pick is Small Cap Value.

For this pick I tried to streamline the process of gathering the data I evaluate. Using Etrades’s Mutual Fund Screener, I selected Small Cap Value Funds and sorted by 5 year performance and cut and paste the data for the best 15 or so funds into a spreadsheet. Then I looked up the Expense info and cut and paste that into the spreadsheet. Then I looked up the profile info and copied that in.

Then I sorted by 3 year performance and did the same thing for the best 15 or so funds. Then I sorted by 1 year performance and copied the same info.

Then I sorted by Expenses and by Fund.

The first thing I noticed was that there was only one fund that was in the top funds for all three periods of time: Delafield Fund DEFIX. This was a tempting choice as consistency is key. There are three reasons I am not picking this fund. 1) Its turnover at 71% is above the average for this category which is 64.51%. 2) The initial purchase minimum is $5000 and I am trying to pick funds with $2500 initial minimum or lower. 3) This fund has shifted into Small Cap Value from Mid Cap Value so some of its performance came from moving from one category of companies to another. We will pick a Mid Cap Value fund and the Mid Cap Blend fund we already picked has coverage of the Value companies in this size so I do not want a Small cap fund that could drift back into Mid sized companies. None of these reasons are deal breakers necessarily so this fund would be a decent choice but I kept looking.

Kinetics Small Cap Opportunity Fund KSCOX was another fund I had to look at despite some red flags. It has done well since its inception and recently it has significantly outperformed its peers. It has higher than average expenses at 1.66% (the average is 1.36%) and higher than average turnover at 96%. There are a couple of other options that have also outperformed recently and have lower expenses and lower turnover so I kept looking.

I ruled out funds with above average expenses and then resorted and ruled out funds with above average turnover. Of the remaining funds there were four that stood out for various reasons:

STSCX has the highest 5 year and 3 year returns of the funds that have below average Expenses (1.28%) and Turnover and has the lowest turnover (15%) of these, but it has lagged its peers recently.

ICSCX has solid and consistent results and the lowest Expenses (0.87%) and very near the lowest Turnover (17%).

HRTVX has the highest 1 year results and has seriously outpaced STSCX and ICSCX over this period with below average Expenses (1.19%) and Turnover (36%).

ATASX has the highest year to date results but also has the highest Expenses (1.30%) and Turnover (56%) of these four.

All four funds have had consistent management over this period so I looked to see the minimum investment limits and if they have consistently invested in small cap value stocks.

STSCX has been consistent and has a $2000 initial minimum.
HRTVX has also been consistent but has a $5000 initial minimum which is too high for this portfolio.
ATASX has a $2500 minimum but has swung to Small Cap Growth and back.
ICSCX is closed to new investors.

ATASX has seriously outperformed STSCX recently, but over a 3 year period, STSCX has outperformed ATASX. The average price to earnings ratio of the stocks in STSCX is 18.52. The PE ratio of ATASX is 24.83 which is above the average for this group (19.60). Since I am looking for a value fund and the stocks in STSCX are cheaper (lower PE ratio), the expenses are less, the turnover is less, the consistency is better, I am not chasing short term performance and am choosing STSCX.

Next Category will be Foreign Small/Mid Cap Growth.

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