When a mutual fund earns 25% in one year, it's usually reason to
celebrate--unless the fund's benchmarks have done even better. Such
is the situation in which T. Rowe Price Small-Cap Value (
) finds itself. Although shareholders are entitled to celebrate,
the fund lacks bragging rights because it has lagged its rivals by
an average of 3.9 percentage points and the small-company Russell
2000 index by five points.
The main reason for the slightly disappointing results: Longtime
manager Preston Athey tilts toward unloved, undervalued stocks, and
lately those stocks have gotten less lovin' than shares of
higher-priced, fast-growing companies. Growth stocks in the Russell
2000 powered ahead 34% over the past year, more than seven
percentage points more than value stocks in the index.
It's also fair to ask whether the fund's $9 billion asset base
is hampering performance. That's huge for a fund that focuses on
companies with market values as tiny as $150 million. But David
Wagner, Small-Cap Value's associate manager, says "size is not a
problem." Much of the fund's assets sit in retirement accounts.
"This is a stable pool of money," he says.
Wagner will take over management of Small-Cap Value next June,
when Athey, who has managed the fund for 22 years, retires. The
transition has already begun. Wagner, who has worked his way up the
ranks since joining Price in 2000, will spend the coming months
shadowing Athey. "We're traveling a lot together and meeting with
companies," Wagner says. Until June, however, Athey has the final
say on all buys and sells. Among Athey's moves earlier this year
was his decision to invest in beaten-down energy stocks, such as
Northern Oil & Gas.
Wagner is hardly a newbie at Price. He first worked with Athey
as a summer intern in 1999, when he was in business school, and
over the years he's worked with all of Price's small-company
managers and 40 or so small-company analysts. Plus, Wagner has a
solid record of his own. As manager of a fund for European
investors that invested in stocks of small and midsize U.S.
companies, Wagner chalked up a five-year annualized return through
August of 12.1%, beating the fund's benchmark by an average of
three percentage points per year. Still, we'll be watching
Small-Cap Value closely as the changeover nears.