Fund Spy

Small-Cap Funds Struggle With Asset Bloat

Linda Abu Mushrefova

Small-cap stocks have been on a strong upward trajectory, as measured by the Russell 2000 Index, since the market’s bottom in March 2009 through June 30, 2018, earning an annualized return of 19.6%. These strong returns outpaced the broader market, as measured by the S&P 500’s return of 18.4% over the same period. However, the effect has been significant market-cap appreciation, raising the concern that some small-cap managers that have remained open to new investors may be capacity-constrained and drifting into mid-cap territory.

The Russell 2000 Index had an average market cap of about $613 million in March 2009 relative to about $33 billion for the S&P 500. As of June 2018, the former has appreciated to over $2 billion while the latter stands at about $99 billion. The small-cap index’s 216% appreciation in average market cap from March 2009 through March 2018 is substantial. Two of the funds highlighted below,  Vanguard Explorer (VEXPX) and  Neuberger Berman Genesis (NBGNX), experienced lower growth rates of 202% and 169%, respectively, but started at above-average market caps. Both funds, in March 2009, had average market caps double that of the Russell 2000 Index, and they continue to hold names that on average are twice as large as the average name held in the index.

Linda Abu Mushrefova does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.

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