(PUB) Investing 2016

4

The Story of Two Bears and Two Bulls Continued From Page 3

Vanguard Small Cap Index. Now it all starts to make sense. Much of the trailing period, especially the first bear market, favored smaller stocks. I’m not sure we learned much about active versus passive, but it’s clear that small was mighty. As for our top two small-blend funds, Royce Total Return RYTRX is another Chuck Royce-comanaged fund that has been a bit sluggish of late, though not nearly as bad as Royce Premier. The fund’s dividend focus has worked nicely over the long run even though there have been bumps. Small Value Small-value funds fared well against the index. Look at its record in a rally and you might not be impressed by Royce Special Equity RYSEX , but it had the best Sortino ratio. Charlie Dreifus’ fund has been a champ through two market cycles. The devil is in the details, and Dreifus learns quite a lot about a company by diving through the minutiae of its accounting. He steers the fund to good companies with healthy balance sheets, and, when you factor in bear markets, the fund is a champ. AllianzGI NFJ Small-Cap Value PCVAX places a great value on dividends, and that has worked quite nicely over the long haul; it has the second-best Sortino ratio. The fund is currently closed, but redemptions might pry the door open to new investors once more. K Berwyn BERWX has had great success because of good stock selection and a bias toward micro-caps.

Large-Value Funds Over 2 Full Market Cycles

Morningstar Analyst Rating • •

Sortino Ratio 03/01/00 to 09/30/16

Return % 03/01/00 to 09/30/16

Manager Tenure (Longest),Years

Name

Ticker

American Century Equity Income

TWEIX

1.20

9.53

21.83

American Century Value

TWVLX

0.89

9.21

23.08

Auxier Focus

AUXFX

—

0.83

7.17

17.25

Fairholme

FAIRX

0.82

10.34

16.83

ˇ

Dodge & Cox Stock

DODGX

0.73

8.95

24.75

Œ

American Beacon Lg Cap Value

AAGPX

0.68

8.01

29.25

´ Œ • • ˇ •

American Funds Washington Mutual

AWSHX

0.67

7.27

19.25

Sound Shore Investor

SSHFX

0.67

7.88

31.42

Invesco Comstock

ACSTX

0.66

8.01

17.17

Invesco Growth and Income

ACGIX

0.62

7.01

17.42

Vanguard Value Index

VVIAX

0.51

6.21

21.83

Torray

TORYX

0.42

5.11

25.83

Small-Growth Funds Over 2 Full Market Cycles

Morningstar Analyst Rating ´ ´

Sortino Ratio 03/01/00 to 09/30/16

Return % 03/01/00 to 09/30/16

Manager Tenure (Longest),Years

Name

Ticker

Neuberger Berman Genesis

NBGNX

1.04

11.41

22.67

Royce Premier

RYPRX

0.86

10.34

24.83

Wasatch Core Growth

WGROX

0.85

11.29

15.83

Œ

Century Small Cap Select

CSMVX

—

0.83

9.99

16.83

Wasatch Small Cap Growth

WAAEX

0.63

8.14

29.83

Œ

William Blair Small Cap Growth

WBSNX

—

0.60

8.58

16.83

LKCM Small Cap Equity

LKSCX

0.59

7.55

22.25

• Œ ´ • ˇ

Brown Capital Mgmt Small Co

BCSIX

0.56

7.76

24.25

Baron Small Cap

BSCFX

0.52

6.97

19.08

Vanguard Small Cap Growth Index

VSGAX

0.51

7.08

11.83

Vanguard Explorer

VEXPX

0.44

5.97

22.67

Let’s start by dismissing the Bridgeway part of the story. The fund focuses on a micro-cap slice of the market as represented by the smallest decile of the CRSP 10 Index. With a tiny average market cap of just $150 million, the fund’s performance relative to peers is prim- arily about micro-caps versus small caps. As the record shows, micro-caps can behave rather differently than small caps. The two Vanguard passive funds differ in two key ways. They follow different indexes, and the tax-managed fund will vary from its benchmark a little more in order to harvest tax losses and minimize fundholders’ tax bills. But their annualized returns are nearly 2 percentage points apart, mainly because the tax-managed fund’s index skews much smaller, giving that fund an average market cap of $1 . 5 billion versus $3 billion for