Big gains come in small packages - finance

Black Enterprise, July, 2001 by Donald Jay Korn

Investors got their money's worth in small-cap value funds

For stock-fund investors, the first quarter of 2001 was grim, to say the least. On average, funds holding U.S. stocks lost nearly 13% in three months. Funds holding large-cap growth stocks, the best performers of the past five years, with a 12% annual rate of return, lost 20% in the first quarter.

There-was one ray of sunlight, though. Of all the stock-fund categories tracked by Morningstar Inc. in Chicago, one category posted positive returns in the first quarter: Small-cap value funds returned nearly 1%. "Value-style investing largely replaced momentum investing in driving stock prices," says Scott Berry, an analyst at Morningstar.

Despite the "small" in their names, these funds don't buy mom-and-pop candy stores; Morningstar counts companies with up to $1.3 billion in market capitalization as small these days. The "value" label denotes that these funds took for companies with cheap stock prices in relation to their sales and assets. Small-cap value funds have invested mainly in industrial (23%) and financial companies (20%). Top holdings include the likes of Borg-Warner (NYSE: BWA), which produces components and systems for vehicle power trains', and Wolverine World Wide (NYSE: WWW), the maker of Hush Puppies.

Why did the stock market turn toward bite-size bargains in the first quarter of 2001? "While the broad market was going into a bear market, small-cap value stocks were coming out of a bear market," says Bruce C. Baughman, manager, Franklin MicroCap Value fund (FBMCX), which produced a return of more than 16% in the first quarter.

According to Morningstar, small-cap value funds hit bottom in 1998, when they lost 7%. In 1999, funds in this category returned 5%, pretty paltry next to the 61% gain of small-cap growth funds. Last year, though, small-cap value funds bounced back, returning 17%, while the average domestic stock fund ran into the red. Thus, first-quarter strength continued the current trend. Indeed, for the last 12 months ending the first quarter of 2001, small-cap value funds returned 13%, tops among diversified stock-fund categories.

An underexposure to tech stocks has certainly helped small-cap value funds recently: As of last report, they had less than 11% of their assets in the tech sector, compared with 33% for large-cap growth funds. Small-cap value funds rode strong first-quarter performances by retail, toy, tobacco, and auto stocks.

The late 1960s and early 1970s were in many ways comparable to the 1990s, when a few large-growth companies like Gillette (NYSE: G) and McDonald's (NYSE: MCD) dominated the market, explains Roger Ibbotson, chairman of Ibbotson Associates, a financial consulting firm in Chicago. The 1973-1974 bear market humbled those companies, when the Dow Jones industrial average plunged from 1,052 to 578, for a loss of 45%.

"In the subsequent five years, small-company value stocks were the big winners," says Ibbotson, "with a 38% annualized return vs. 14% for large-company growth stocks. In that period, investors made four times as much money with small-value stocks as they did with large-growth stocks."

History may be ready to repeat itself. By their nature, small-cap value stocks tend to be takeover targets and, even after a year of relative strength, small-value issues are still attractively priced. Baughman says that he's looking at community banks. "There may be opportunities to buy some of these banks at low prices, before larger institutions make acquisitions."

If the tech bubble has truly burst, small-cap value funds may benefit by snatching up companies that have fallen into their price category. Turned-off tech investors may boost demand in other market sectors: "If only 2% of the money coming out of technology stocks goes into small-cap value stocks," Baughman says, "that would have a major upward impact on prices."

TOP 5 RETAIL SMALL-CAP VALUE FUNDS

                                         Year-to-Date     1-Year Ann.
Fund Name (Ticker)                      Total Return(*)   Total Return

Boston Part Sm Cp Vall II Inv (BPSCX)        24.16%          52.51%
N/I Numeric Inv Sm Cap Val (NISVX)           11.50           39.22
American Cent Sm Cap Val Inv (ASVIX)         13.60           36.51
Advantus Venture A (ADVAX)                   13.76           27.95
FMC Strategic Value (N/A)                    12.41           12.33

                                          3-Year Ann.     5-Year Ann.
Fund Name (Ticker)                       Total Return     Total Return

Boston Part Sm Cp Vall II Inv (BPSCX)         N/A             N/A
N/I Numeric Inv Sm Cap Val (NISVX)            N/A             N/A
American Cent Sm Cap Val Inv (ASVIX)          N/A             N/A
Advantus Venture A (ADVAX)                   1.15             N/A
FMC Strategic Value (N/A)                     N/A             N/A

                                           Toll-Free      Minimum
Fund Name (Ticker)                          Number        Initial
                                                         Investment

Boston Part Sm Cp Vall II Inv (BPSCX)    888-261-4073      $2,500
N/I Numeric Inv Sm Cap Val (NISVX)       800-686-3742       3,500
American Cent Sm Cap Val Inv (ASVIX)     800-345-2621       2,500
Advantus Venture A (ADVAX)               677-362-4099         250
FMC Strategic Value (N/A)                800-932-7781      10,000

(*) Return through 5/4/01

Source: Morningstar Inc., Yahoo! finance
BOTTOM 5 RETAIL SMALL-CAP VALUE FUNDS

                                    Year-to-Date      1-Year Ann.
Fund Name (Ticker)                 Total Return(*)   Total Return

Corbin Small-Cap Value (CORBX)          6.34%          -34.98%
Lord Abbett Alpha A (ALFAX)            -4.25           -28.84
HSBC Investor Opportunity A (HSOAX)    -0.59           -22.29
Monterey PIA Equity (MNTEX)             4.16           -21.61
Fairmont (FAIMX)                        7.45           -11.55

                                     3-Year Ann.    5-Year Ann.
Fund Name (Ticker)                  Total Return   Total Return

Corbin Small-Cap Value (CORBX)         -17.97          N/A
Lord Abbett Alpha A (ALFAX)             -3.67          N/A
HSBC Investor Opportunity A (HSOAX)      7.72          N/A
Monterey PIA Equity (MNTEX)              0.72          7.50
Fairmont (FAIMX)                       -12.87         -2.83

                                         Toll-Free         Minimum
Fund Name (Ticker)                        Number     Initial Investment

Corbin Small-Cap Value (CORBX)         800-924-6848          2,000
Lord Abbett Alpha A (ALFAX)            800-201-6984          1,000
HSBC Investor Opportunity A (HSOAX)    800-782-8183          1,000
Monterey PIA Equity (MNTEX)            800-251-1970          1,000
Fairmont (FAIMX)                       800-262-9936          1,000

(*) Return through 5/4/01

Source: Morningstar Inc., Yahoo! finance