Mike Balkin, manager of the William Blair Small-Cap Growth Fund, is an optimist, even though his fund was down about 50% in value in 2008. Eventually, when the economy improves, small stocks are expected to lead the way, and could mean double-digit or even triple-digit gains as market sentiment and business conditions improve.
"It is a very difficult time for investors," he says, adding that today could "be one of the great opportunities to buy small-cap stocks in my lifetime. You could make a tremendous amount of money in the next three to five years."
He sees the biggest gains in micro-cap stocks. The largest holdings in the fund include DG FastChannel Inc., United Online Inc., Smart Balance Inc. and Silicon Laboratories Inc.
International fund managers are not very optimistic about 2009, yet the valuations and growth rates of overseas stocks are more attractive than those in the U.S., says Thomas Melendez, a portfolio manager with the MFS International Equity Fund.
"There was no place to hide in 2008," he says. "But there should be less correlated equity returns going forward as economies in the emerging markets return to faster growth rates than those of the developing world."
Todd McCallister, co-manager of the Eagle Mid-Cap Stock Fund, invests in midcap and small-cap companies with strong balance sheets, good free cash flow and stable-to-improving profit margins. He believes 2009 could be another bad year because of a slow economic recovery, but that 2010 could be a great year for midsize companies and small companies.
"I'm buying high-quality stocks that are going down as much as lower quality," he says. "The stocks held by the fund are selling at or below book value but have strong cash flow and balance sheets."
McCallister particularly likes small insurance companies and reinsurance companies. These firms don't have the credit problems of other financial companies. Reinsurance company premiums are rising because other firms are looking to insurance as an alterative source of capital. The fund's largest holdings include AON, Reinsurance Group of America and Arch Capital Group Ltd.
