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Funds of the Month


Small-cap value

Small-cap value

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Choose article section... What they offer The choices

What they offer

The potential for stellar gains, with less volatility than you'd have with small-cap growth funds.

"Small-cap value stocks are often ignored by Wall Street," says Pran N. Tiku, CFP, a financial adviser with Peak Financial Management, in Wellesley, MA. "So, they often sell at attractive prices and bring opportunities to grow as the economy does. If the companies thrive and are discovered by analysts and investors, they could take off, and so could the funds that invest in them."

While the S&P 500 Stock Index rose 19.1 percent over the year and lost 2.2 percent annually over five years (through June 30), the S&P SmallCap 600 Index returned 35.2 and 10.7 percent, respectively, for the same time frames.

The choices

Third Avenue Small-Cap Value Fund. Portfolio Manager Curtis Jensen hunts for companies that are financially solid, have competent management, and are selling for far below their estimated intrinsic value because of temporary setbacks.

Some of this fund's major holdings might spark a "What?" rather than a "Wow!" For example, its largest asset is Brascan, a Toronto-based asset management company with investments in the real estate and power generation sectors throughout North America. You could have picked up a share of Brascan 20 years ago for about 10 cents (adjusted for subsequent splits); in March, 2004, the price hit a high of 40. It now hovers around 28.

With a relatively small number of stocks in the portfolio—currently 69—Jensen buys and holds, biding his time until the companies shine. The share price for one top holding, Forest City Enterprises, a Cleveland company that buys, develops, and manages commercial and residential real estate in the US, has risen from about 10 to 53 in the past decade. The fund has also taken a stake in TimberWest Forest, the largest owner of private forestlands in Western Canada.

"This fund has a disciplined management style and a very consistent record of beating the S&P SmallCap 600 Index," says Pran Tiku.

Royce Total Return Fund. Portfolio Manager Charles Royce works to minimize risk. His fund presently holds more than 350 stocks, so if one company takes a nosedive it won't drag down the portfolio. As another defensive move, Royce looks for businesses with strong cash flow, solid balance sheets, and high internal rates of return.

"This unique fund not only discovers hidden gems, but it also uncovers small companies that pay dividends, thereby reducing risk," says Tiku.

Royce sidesteps tech stocks in favor of industrial and financial products companies. Currently, the fund's top financial services stocks are Erie Indemnity, a property and casualty insurance company in Erie, PA, and TSX Group in Toronto, which owns and operates the Toronto Stock Exchange and provides data to the financial community. In the industrial realm, a lead holding is Rayonier, a Jacksonville, FL, forest and timber goods company that supplies wood products to more than 50 countries.


Minimum initial investment
Total return*
1 year
3 years
5 years
Royce Total Return Fund
Third Avenue Small-Cap
Standard & Poor’s 500 Stock Index
Standard & Poor's SmallCap 600 Stock Index


Leslie Kane. Funds of the Month: Small-cap value.

Medical Economics

Aug. 6, 2004;81:54.

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