A few small-cap fund managers are bucking a broader decadelong trend of losing to large-caps by betting on a handful of winning stocks.
Small-cap stocks are in a deep slump. They have underperformed large caps seven of the past eight years. That trend is continuing this year, with small caps posting a gain of just 3% so far, compared with large caps’ gain of around 20%, according to FactSet.
Still, a small number of small-cap funds have outpaced the market so far this year. Of nearly 400 actively managed small-cap funds tracked by LSEG, a provider of market data, eight are beating the
And they aren’t necessarily big-name funds from managers such as T. Rowe Price or Fidelity. The largest, Hood River Small-Cap Growth, oversees about $2.7 billion in assets. The smallest, Carillon Chartwell Small Cap Growth, has less than $20 million.
The funds succeeded by taking big swings and scoring big hits. All eight of the funds have at least two stocks among their top 10 holdings that have tripled in value over the past year. Several funds have more than two such stocks.
which is up 264% this year, and insurance marketplace
up 215%, are among those names.
Advertisement – Scroll to Continue
FTAI stock crops up repeatedly among the group. Shares have returned nearly 250% over the past 12 months. The stock is among the top three holdings in five of the eight small-cap funds on the list and in the top 10 among all but one.
FTAI, which leases and sells aircraft engines, isn’t an unusual stock for small-cap managers to own. In fact, it is the second largest holding in the
iShares Russell 2000 exchange-traded fund,
although it represents just 0.4% of that fund.
The market-beating active managers, none of which have more than 110 positions, own vastly more concentrated stakes in FTAI. The stock is 4.9% of Hood River Small-Cap Growth’s portfolio and 4% of John Hancock Small Cap Dynamic Growth’s.
Advertisement – Scroll to Continue
Hennessy Cornerstone Growth Investor is the only small-cap fund among the group of eight to beat the S&P 500 without owning FTAI as of June 30.
While FTAI may not be as glamorous as
—whose stock has surged 202% in the past year—it has benefited from the travel boom that has led to surging demand for aircraft. It has also been a beneficiary of
Boeing
’s
problems and broader manufacturing issues in the airline industry, as Barron’s pointed out in February. Those factors have helped the company handily beat Wall Street forecasts at the end of last year, earning $212 million, 45% above what analysts were looking for. Analysts expect profit to surge another 50% over the next two years.
FTAI’s market cap has surged as well. It began this year with a market cap of $4.65 billion and closed Tuesday at $10.5 billion.
Like with Nvidia, which has powered the returns of so many large-cap funds, whether or not FTAI can keep rising at today’s valuation is another question. It is currently trading at about 41 times next year’s estimated profit, up from about 22 times at the start of the year.
Despite the dominance of the Magnificent Seven, it shows there are small-cap moonshots out there for stockpickers who are smart enough—or lucky—to find them.
Advertisement – Scroll to Continue
Write to Ian Salisbury at [email protected]
