Favorite Funds Update - Small Cap Growth Category

October 12, 2011

Mutual funds that invest in smaller cap stocks are a frustrating breed. Just when they start looking good, they attract loads of investor money and get too big to keep it going. 

When we first picked Janus Triton (JATTX) in May 2007, it had just under $300 million in assets. As a fund family, Janus had fallen far out of favor by then, having lorded over mostly larger cap growth funds that all owned the same nifty-fifty, high P/E growth stocks in the tech bubble, only to see most funds and assets under management fall hard in 2000-2003. 

By 2007, most fund investors were also favoring value and dividend-oriented funds (after getting burned in growth in 2000, probably in Janus funds, with a smattering of PBHG, Firsthand, and Van Wagoner funds thrown in for diversification…). This was not long before the banks collapsed and the so-called Great Recession began.

Fast forward to today, and growth stocks beat value stocks (remember banks were value stocks with high dividends). Most relevantly, Janus Triton has killed the typical fund in its fund category, the S&P 500, and small cap value. Of course, good performance doesn’t go unnoticed. Earlier this year, Triton tipped the scales at about $2 billion. Imagine trying to place that into fifty small cap stocks. Each holding would need $40 million – or 10% of the outstanding shares of a small cap $400 million dollar company. Keep in mind most funds don’t equally weight stocks. They own maybe 5% of fund assets in their top picks. That’s a $100 million dollar stake. Now the two managers running this fund own 85 holdings. The top pick is SBA Communications (SBAC), a nearly $5 billion dollar market cap stock prior to the 2011 stock slide. That’s a small cap fund pick?

At this point, you'd do better over the next three years in a small cap growth index (though not until now), and save on the higher active management fees (although Triton fund is not that expensive). Triton’s days in the top 1% of small cap growth funds, where  it has been in recent years, are likely over. Note that index funds tend to have slightly more downside during down markets than similar actively managed funds.

At $214 million in assets, our replacement, Nicholas Limited Edition Class N (NNLEX), is still small enough to pick good companies. The established company behind the fund has had a good record with their other similar funds. This fund also carries a bit less risk than Triton, which  we recommend until smaller cap growth is better positioned to beat the market. Keep an eye on the MAXfunds category rating for small cap growth.

To view the complete list of small cap growth favorites, click here.