(PUB) Morningstar FundInvestor

3

Morningstar FundInvestor

July 2 013

Small Caps Have Rallied but Valuations Have Not Returned to 2003 Levels

p Morningstar Small Cap Monthly P/E

p Morningstar Small Cap Monthly USD

30

10,000

24

8,000

18

6,000

12

4,000

2,000

6

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Data through May 2013. Peak P/E Lowest P/E

produced strong results elsewhere, and we like the fund’s new guise.

tile for the past 10 years. Low costs and a savvy approach to trading in a liquidity-challenged universe have helped them succeed where other passive funds have been mediocre. DFA ’s strategy is to sell the stocks that have eager buyers and buy the ones that have eager sellers in order to reduce or eliminate bid-ask spreads. Great Performances Not that you should buy based on half a year’s returns, but it’s worth noting where the top performers have been. Loomis Sayles Small Cap Growth leads the way with a 23% gain. Next is passively managed Bridgeway Ultra-Small Company Market BRSIX , which has gained 23% —interestingly, that’s a lot more than other micro-cap funds. And William Blair Small Cap Growth WBSNX is up 24% . There’s not much to unite the three funds. Loomis and Bridgeway have large health-care weightings and less in mining and other resource stocks. William Blair Small Cap Growth doesn’t have that profile, but Karl Brewer and team have found a diverse group of growth champs such as Pandora P, Nu Skin NUS , Gentherm THRM , and WNS WNS . œ Contact Russel Kinnel at russel.kinnel@morningstar.com

We also raised Fidelity Small Cap Discovery FSCRX to Gold from Silver when the firm announced the fund would close to new investors. Chuck Myers has done an outstanding job, but asset size and the chance that they would close too late were our biggest concerns. On the downside, we dropped Janus Venture JAVTX and Janus Triton JATTX to Neutral from Silver when Chad Meade and Brian Schaub departed. They did a brilliant job in their time at the funds, and it’s a real loss to see them go. However, they may turn up on Meridian Growth MERDX , which was purchased by their new employer, Arrowpoint. We rate Meridian Growth Neutral but would review that rating if Meade and Schaub took over. Passive Deserves a Look Many investors choose to index large caps and pick active small caps. That’s a fine approach, but passive can work here, too. Vanguard Tax-Managed Small Cap VTMSX and DFA US Small Cap DFSTX have solid 10 -year returns that rank in the top quar-