(PUB) Morningstar FundInvestor

July 2013 Vol. 21 No. 11

FundInvestor Research and recommendatio s for the s riou fund investo

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The State of Small-Cap Funds

Small Cap CCASX , Bogle Small Cap Growth BOGLX , and Berwyn BERWX . All remain open and are either receiving small inflows or small outflows. This means that the fund managers have free rein to invest without being encumbered by asset bloat. If the outflows continue through the year, we may see some good funds reopening to new investors, so build your watchlists. Gold-rated Perkins Small Cap Value JSCVX shed $ 484 million through the past six months to get down to a $ 2 . 5 billion asset base. Gold-rated Artisan Small Cap Value ARTVX has seen $ 270 million go out the door so that assets are down to $ 2 . 7 billion. I’m also intrigued by Loomis Sayles Small Cap Growth LCGRX , which has shed a more modest $ 46 million to get down to $ 945 million in assets. Silver- rated American Century Small Cap Value ASVIX is down to $ 2 billion after $ 49 million in redemptions. Now for the bad news about outflows. Small caps aren’t always that liquid, and forced selling from redemptions can lead a fund to drive down the price of a stock on its way out the door. We asked one small-cap shop if outflows were creating a problem. The firm said no, there are plenty of buyers in a rally and they can unload stocks easily. I’m sure that’s the case, but what if the rally turns into a bear market? If a fund is getting redeemed now, you can be sure it will really get clobbered with outflows in a down market. And that’s when it’s hard to sell. The five Morningstar 500 funds with the greatest outflows are Royce Low Priced Stock RYLPX ($ 993 million), Perkins Small Cap Value ($ 680 million), Fidelity Small Cap Stock FSLCX ($ 677 million), Continued on Page 2

RusselKinnel, Director of FundResearch and Editor

Fund Reports

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It’s been a nice run for small caps. The typical small- cap fund has gained an annualized 14% over the past three years and 7% over the past five years. Even in the recent “tapering” sell-off, small caps suffered about half the losses of large-cap stocks. Yet investors, whose dollars often follow strong per- formance, seem not to have noticed. Most small-cap funds are seeing money go out the door rather than in. Those flows could spell opportunity, as our Buy the Unloved studies suggest. But they could also signal a problem. And the rally we’ve seen makes it easy to see why some investors argue small caps aren’t cheap. Although some of the best small-cap funds have closed recently, there are more good funds still open than you typically see five years into a strong rally. Let’s take a look at the opportunities and potential pitfalls awaiting investors in small caps. Outflows The good news about outflows is that it means some funds have not grown too large nor have they had to close because of hot money. Quite a few Morning- star Medalists have had net outflows for the six months ended May 31 , and the June sell-off will only increase that. Seventeen Morningstar 500 small-cap funds have less than $ 700 million in assets including Silver-rated Century Small Cap Select SXMVX , Conestoga

Dodge & Cox Balanced Fairholme Focused Income T. Rowe Price Emerging Markets Stock Vanguard Wellesley Income

Morningstar Research 8 Your Guide to Emerging Markets

The Contrarian 10 The Other Side of the Yield Trade

Red Flags

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TIPs Get Smacked

Market Overview

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Leaders & Laggards

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Manager Changes and News

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Portfolio Matters 16 Simplifying a Seasoned Profes- sional’s Portfolio

Tracking Morningstar

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Analyst Ratings

Income Strategist

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FundInvestor 500

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FundInvestor 500 Spotlight

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Follow Russ on Twitter @RussKinnel