Rough Patch For Small-Cap Mutual Funds

Over long periods, small-cap mutual funds often outperform large- and midcap funds. But the past 10 years have seen small-cap funds run in line with or lag midcaps.

A $ 10,000 investment in the average small-cap mutual fund on June 30, 2005, would have grown to $ 21,650 by Aug. 24, according to Morningstar Inc. data. The same amount would have climbed to $ 22,838 in the average midcap fund, $ 19,587 in the average large-cap fund and $ 19,659 in the S&P 500.

Small-cap mutual funds have struggled this year as the stock market has run out of steam. They’re down 7.2% this year and 10% since June 30. Large-cap mutual funds are down 6.8% and 8% in the same periods. Midcap funds are down 5.3% and 8.2%, while the S&P 500 tracked with large caps, falling 6.8% and 7.9%

Top-performing small-cap funds still show impressive performance numbers despite their being whittled down by the market slump. Lord Abbett Micro Cap Growth has handed investors an average annual return of 12.64% the past 10 years vs. 6.81% for the S&P 500.

Year to date, the $ 145 million fund is down 2% vs. a 7% decline for the S&P 500, a proxy for the broad stock market.

The fund has been managed by F. Thomas O’Halloran III since 2006, Matthew DeCicco since 2002 and Arthur Weise since 2007. Its recent holdings included Luxoft Holding (NYSE:LXFT) and Stamps.com (NASDAQ:STMP).

Luxoft, which makes software for companies operating in the financial, technology, telecom and auto industries, has an IBD Composite Rating of 97, the highest in its Computer Software-Enterprise group.

Luxoft has grown earnings at a 27% annual rate the past three years. Analysts polled by Thomson Reuters see earnings per share rising 22% in the current fiscal year ending March 31 and 17% next year.

Luxoft’s 8% dive Monday amid the stock market rout took the stock under its 10-week moving average. It found support at its 200-day line. Luxoft rebounded 6% Tuesday, putting it 13% below its all-time high reached Aug. 13.

Stamps.com has a Composite Rating of 99, the highest in its Retail-Internet group and the highest possible. The provider of electronic postage has grown earnings at a 23% clip the past three years. Analysts see 38% growth this year and 12% next year.

The stock is also 13% off its high and has found support at its 10-week line.

Follow Doug Rogers on Twitter: @IBD_DRogers.

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