Small-cap growth investors might feel as if they've been tossing around in the clothes dryer in 2000, but that doesn't mean it's time to give up on aggressive investment styles.
It's true that small-growth funds may not be flying quite as high as they were during 1999's fourth-quarter technology rally. But the tech sell-off that began in mid-March has ended, at least temporarily, and not every small-growth portfolio is filled with skyscraping price-earnings ratios and loads of volatility. A few tamer options also exist.
Our list of small-growth picks has seen some instability of its own lately.
The $5 billion RS Emerging Growth closed in May and, therefore, no longer qualifies as an Analyst Pick. Hartford Small Company lost manager Mark Waterhouse to a hedge fund early this year. Although the fund's new manager, Steve Angeli, is experienced and the firm has a deep research team to back him up, he needs to prove his mettle before we'd recommend that new investors jump in. Former pick Nicholas Limited Edition's weakening long-term record led to its removal from the list.
Thus, you'll find a few new faces among our small-growth picks, as well as some funds that have held on since the last round.
Baron Growth: This fund has lost some of its luster lately, but its long-term results are still solid. This fund's returns might not be as eye-popping as those of some of its racier peers, but they have been less volatile. A valuation-conscious approach by manager Ron Baron, as well as the fund's below-average tech stake, has helped in that regard.
Managers Special Equity: This fund's more blended approach means it likely won't be one of the group's truly wild ones. However, its lineup of four subadvisers, whose specialties run from go-go growth to value, has produced a well-diversified portfolio that holds up well.
RS Diversified Growth: This fund walloped most of its peers in 1999's tech rally. The small asset base allows the managers to stick with their small-cap focus. Although its aggressive stance makes the fund more volatile than its typical peer, a diversified portfolio of about 150 stocks and management's strict sell discipline have helped to mute those gyrations.
USAA Aggressive Growth: Despite big short-term performance swings, the fund has benefited from management's thematic investing style to often find the right part of the market, including a successful telecommunications bet in 1999. The three- and five-year returns land in the category's top half. The expense ratio is one of the category's lowest.
Van Wagoner Post-Venture: Fasten your seatbelt. Manager Garrett Van Wagoner, one of the more experienced small-growth managers, is known for his aggressive investment strategy and willingness to take positions in small, unproven companies. The fund focuses on early-stage growth companies that have received venture-capital funding. The appeal would be greatly enhanced if the fund's expenses, which far outpace the category average, were slashed.