(PUB) Investing 2016

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Small-Growth Funds on a Roll Tracking Morningstar Analyst Ratings | Russel Kinnel

T. Rowe Price New Horizons PRNHX Henry Ellenbogen took over this fund in 2010 , and he’s proved a worthy successor to Jack Laporte. The fund’s $16 billion asset base forces Ellenbogen to own nearly 200 stocks; they skew toward the borderline of mid-cap and small-cap, but he uses that diversification to tone down volatility a bit. He seeks out well-run companies with good business models. Remarkably, the fund hasn’t lagged peers or the Russell 2000 Growth Index in a single calendar year since Ellenbogen took over. We rate this closed gem Silver. Here’s yet another tremendously successful, very diversified T. Rowe Price small-cap fund, but this one is open. The two funds stay out of each other’s way because this is a quantitatively run fund with different inputs. Sudhir Nanda employs a valuation model, an earnings quality model, and a price momentum model. As a result, this fund has a smaller median market cap and a less growth-driven portfolio. We gave the fund a Bronze rating in 2012 and raised it to Silver in 2015 . Since we issued the Bronze rating, the fund has gained a cumulative 74% compared with 54% for the small-growth category. With overlapping managers and similar strategies, these funds also have pretty similar profiles and performance, but they’re not carbon copies. Jeff Cardon stepped back from his spot as lead manager on Wasatch Small Cap Growth in February, staying on as comanager with J.B. Taylor moving up to lead. Taylor also leads Wasatch Core Growth with Paul Lambert as comanager. Wasatch Core Growth is a bit less growthlike and has better five-year returns, though the two are quite close when you go out to 10 - and 15 -year returns. Neither fund has returns as great as those above, but they boast solid strategies, experienced managers, and good analyst support. Wasatch Small Cap Growth is closed to new investors, but Wasatch Core Growth remains open. K T. Rowe Price QM U.S. Small-Cap Growth Equity PRDSX Wasatch Core Growth WGROX and Wasatch Small Cap Growth WAAEX

This month we take a look at six of our higher-rated funds in the small-growth Morningstar Category. This article is about tracking performance, so I hope you’ll forgive me for including three funds that are closed to new investors. Funds that are closed are a big part of the small-cap fund world, and I would be remiss if I left these three out. Besides, these funds may reopen, and you might get another shot if you missed them last time. Brown Capital Management Small Company BCSIX The managers of this closed fund, which has a Morningstar Analyst Rating of Gold, won Morningstar’s Domestic-Stock Manager of the Year award for 2015 , and you can see why from their record. The fund’s five-year returns of 15 . 4% annualized, 10 -year returns of 13 . 3% , and 15 -year returns of 9 . 3% beat most of its peers and the Russell 2000 Growth Index. Keith Lee and team set the bar high by looking for durable growth stocks with strong balance sheets. Not many small caps fit the bill, but when they do, management tends to hold on for the long haul. Conestoga Small Cap CCASX This Silver-rated (and open) fund once again rewarded shareholders who stayed with it after a slow patch. The fund’s 8% loss in 2014 was followed by an 8% gain in 2015 that placed it in the top 3% of the cate- gory. More important, the fund’s 10 -year returns are top-decile. It typically carries a big tech weighting while investing only a small amount in cyclical busi- nesses. Thus, its performance often tracks that of tech. Joseph Monahan and Robert Mitchell look for companies with huge growth potential and sound strategies. The results have been strong but bumpy.

What Are Morningstar Analyst Ratings?

Our ratings are chosen for long- term success. Analysts assess a fund’s competitive advantages by analyzing people, process, parent, performance, and price. They do rigorous analysis and then submit their ratings to a committee that vets their work for thoroughness and consistency.