That quote from baseball legend Casey Stengel would apply to the job of stock-fund manager these days. Under the pressure of an uncertain stock market and banking system—and the Federal Reserve’s relentless interest-rate increases to try to tame inflation—it has been harder than ever for stock-picking fund managers to grind out gains.
A year ago, when managers closed the books at the end of the 2022 first quarter, scores of funds posted healthy gains, and all 10 that topped the list in The Wall Street Journal’s quarterly Winners’ Circle survey of outperforming funds delivered returns north of 20%. Flash forward to today, and the picture is different: The market is down for the 12 months, and of the 1,257 qualifying mutual funds in the survey, only 27 managed to eke out any kind of positive return, and only 10 posted a return north of 3%.
The average performance for the funds was minus 8.3%, trailing the S&P 500 index’s total return of minus 7.7%.
That makes the achievement of the team of managers that oversees
fund (VFPIX) all the more impressive. Alone within the Winners’ Circle universe, the fund posted a double-digit gain for the rolling 12 months, rewarding investors with an 11.3% return. And they accomplished this feat without a single energy stock in their portfolio, even as the energy sector of the S&P 500 has been the sole bright light.
“We’re not trying to understand everything that’s happening in the broader market,” including trends in oil prices in response to news from Ukraine or OPEC members, says
managing director of research at Private Capital Management LLC in Naples, Fla., and a member of the fund’s management team.
Attempting to forecast trends in interest rates, oil prices and inflation “just is not in our scope of expertise,” he adds. Instead, Mr. Sissman says, “We keep looking for idiosyncratic companies doing their own thing and doing it well.”
To qualify for inclusion in the Winners’ Circle survey, funds must be actively managed U.S.-stock funds with more than $50 million in assets and a record of three years or more, as well as meet a handful of other criteria. The survey excludes index and sector funds, funds that employ leverage strategies and most quantitative funds. The results are calculated by Morningstar Direct.
The Private Capital fund does hold one company that benefits from higher crude-oil prices—
Target Hospitality Corp.
provides workforce lodging services to the energy industry, among other clients—but for the most part, Private Capital’s portfolio is full of low-profile small businesses that offer what the team views as good fundamentals.
Harrow Health Inc.,
an eye-care pharmaceutical company. It’s one of a handful of companies that Mr. Sissman and his colleagues added to the relatively concentrated portfolio last year, and as revenue and profitability climbed, so did its share price, which tripled in the 12 months. “As more seniors get cataract surgery, for instance, more ophthalmologists are looking at Harrow’s compounded pharmaceuticals to improve outcomes,” Mr. Sissman says.
Best 12-month total return through March 31, 2023, actively managed U.S.-stock funds
1. Private Capital Management Value (VFPIX) 11.3%
2. Virtus KAR Small-Cap Core (PKSFX) 8.7%
3. Hennessy Cornerstone Mid Cap 30 (HFMDX) 8.4%
4. Oberweis Micro Cap (OBMCX) 6.5%
5. Oberweis Small-Cap Opportunities (OBSOX) 6.4%
6. FMI Common Stock (FMIMX) 6.0%
7. Dean Small Cap Value (DASCX) 4.9%
8. Fuller & Thaler Behavioral Small-Cap Equity (FTHFX) 4.3%
9. Palm Value Capital (PVCMX) 4.2%
10. Franklin MicroCap Value (FRMCX) 3.4%
Source: The Wall Street Journal, from Morningstar Direct data
Private Capital Management itself may be just the kind of small, idiosyncratic business in which its portfolio managers like to invest. It evolved from the family office of Florida’s Collier family (the descendants of Barron Gift Collier, a streetcar advertising magnate who became one of the state’s largest private landowners); today, the boutique firm manages some $1 billion in assets, only $52.7 million of which is invested in the mutual fund.
In fact, this quarter’s list of top-performing funds is dominated by smaller funds and the smaller stocks that they invest in. Of the 27 funds that had even modest gains in the 12 months, only four invested in large-cap stocks, while another four were midcap funds. The remaining 19 funds that were on the plus side invested mostly in small or microcap stocks. And two-thirds of those funds were themselves relatively small, with assets of less than $1 billion.
“This world of small companies is where there’s a lot of room for stock pickers to thrive,” says Mr. Sissman. He views the large-cap world as increasingly perilous. “Last year, five giant companies—the parent companies of Google and Facebook,
—accounted for more than 20% of the total market capitalization of the S&P 500.” That has made these companies simply too big to continue to grow, he argues. “The only interesting new market for any one of them is something that one of the others already dominates,” he says.
Score at the Quarter
Stock funds posted their second positive quarter, after three quarters of pain. Average total return for U.S. diversified funds.
Runner-up: Small-cap fund
The team overseeing
fund (PKSFX), which finished second in the survey with an 8.7% return for the 12 months, may have a much larger pool of assets to invest—some $1.7 billion in the fund alone—than Private Capital Management, but the two groups of managers share an affection for small-cap stocks.
“It’s so much easier to differentiate our portfolio from our peers and from the industry by looking within the small-cap world, where there are thousands of companies with a wide variety of financial profiles,” says
portfolio manager and senior research analyst at Los Angeles-based Kayne Anderson Rudnick, or KAR. He and his colleagues look for established smaller companies with growth potential but that trade at solid valuations—what he calls “plain vanilla” businesses that range from selling branded golf balls to a truck brokerage. “In a 12-month period when there’s a roaring bull market, we won’t be among the top performers, but when times are tougher, these companies keep going,” he says.
In the most recent 12 months, the Virtus KAR fund has benefited from owning stocks like
which provides commercial-property owners with a workforce of skilled tradespeople, ranging from plumbers to HVAC specialists, as well as
(which owns the Titleist golf-ball brand). Mr. Beiley says the fund is agnostic when it comes to sectors: “We just want to own businesses that are prospering and to pay a good price for them.”
chief investment officer of Hennessy Advisors and a member of the portfolio management team overseeing third-place finisher
(HFMDX), is similarly focused on valuation and shares Mr. Beiley’s willingness to run what some might view as an eclectic portfolio. To Mr. Kelley, however, the fund—which posted a gain of 8.4% for the 12-month period—reflects the best investment options from the universe of stocks with a market capitalization of $1 billion to $10 billion.
But Mr. Kelley and his colleagues don’t emphasize only valuation when making their stock selections for the fund’s concentrated and equally weighted portfolio. “We want to combine value with momentum and find companies that are growing their earnings and seeing that reflected in their share price,” he says.
That led the
team in its annual portfolio review last autumn to add energy stocks to the mix. Some of those new additions, such as independent refiner
have contributed to the fund’s outperformance, along with long-established positions in businesses like
“What we do with this fund is to identify sectors that have been out of favor, that have had their valuations pushed down, but that still have companies with solid fundamentals poised for a turnaround from which we can benefit,” Mr. Kelley explains.
Even as these managers and their funds enjoy their moment in the sun, as the volatile stock market disproportionately rewards stability and predictability, it’s important to be aware that just as the market’s mood shifts, so may the lineup of top-performing funds. Former Winners’ Circle winners, including some that rode the technology-stock boom, posted double-digit losses for the most recent rolling 12-month period of the survey, leaving them at the bottom of the heap.
That’s one reason that readers should view this glimpse at current top performers as a way to gain insight into different approaches by fund managers. It isn’t intended as a recommended list: individual risk tolerances and investment objectives vary, and some funds may carry high fees, be closed to new investors or be otherwise unsuitable for a particular investor.
Ms. McGee is a writer in New England. She can be reached at email@example.com.
Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8