The pullback in shares of small companies this year has sent even the largest small-cap funds reeling. Yet the best-performing fund in the category is a tiny one less than six months old.
In December, Hodges Capital quietly introduced the Hodges Small-Mid Cap fund, which focuses on companies whose market values reach up to $8 billion. That is well above the $3 billion threshold in the $1.2 billion Hodges Small Cap fund for which the Dallas-based firm is best known.
Through Tuesday, the $6.2 million Small-Mid Cap fund had gained 6.1 percent for the year, compared with an average loss of 6 percent among the 730 funds in the small growth category, according to fund tracker Morningstar. The fund's performance also beat all mid-cap growth funds, which have an average gain of 1.3 percent this year.
The new fund provides a way for the firm to continue buying into companies whose performance puts them above the ceiling of its small-cap fund, said Craig Hodges, a portfolio manager of both funds. Hodges Small-Mid Cap's top holdings include cement manufacturer Eagle Materials Inc, Alaska Air Group Inc and railroad company Kansas City Southern, all of which have market values of $5 billion or more.
"We believe that this will eventually be our flagship fund," Hodges said. The fund, which is overweight in industrial, energy and consumer discretionary companies, has seen its largest gain in Alaska Air, whose shares have rallied 33 percent this year after its quarterly results beat analyst expectations. Its second-largest gain came from Garmin Ltd, whose shares are up about 21 percent for the year as sales of GPS-enabled running watches and collision-avoidance systems used by small aircraft are making up for a decline in its personal navigation devices. About 18 percent of the portfolios of the two funds will overlap, Hodges said.
Both will draw on research from the same staff of eight analysts, who will continue to look for companies with high barriers to entry, expanding margins and few rivals. Yet investors may want to wait before buying Hodges Small-Mid Cap, said Todd Rosenbluth, head of mutual fund research at S&P CapitalIQ.
"They may be using the same investment research to support it, but the fact is that this is a completely new fund that is investing in a different size of company," he said. "Investors should get at least a year's worth of history before they make a judgment." Rosenbluth said the fund might look particularly good this year against other small-cap funds because it also includes mid-caps, which have not fallen as steeply as smaller companies in the recent selloff.