VC Funds Basically Suck and Charge Huge Fees: Shall we Troll the Small-Caps Instead?


Venture capital funds sucked up a lot more money than they spat out for more than a decade, an underperformance still fed by insecure investment managers who fear getting voted off the island if they balk. Perhaps it's time to glorify some successes by the outcasts, those individual stock pickers who never got invited to the party in the first place.

The illuminating report on fund performance and the frat pledge mentality that fuels it comes from the Ewing Marion Kauffman Foundation, an entrepreneurship promoter with about $250 million in venture capital investments. In "We Have Met the Enemy…And He is Us" published this month, Kauffman describes 20 years of disappointing experience with more than 100 venture capital funds by 60 general partners. As a whole, Kauffman notes, the venture capital fund industry hasn't returned the cash invested since 1997.

Kauffman largely blames a counterproductive fee structure for taking away their profits. According to the report, managers at institutions, pension funds and other foundations don't complain because they fear being shut out of the most lucrative funds in the future. (Some, usually the smaller ones, did make money.) Venture capital is apparently a clubby business in which the poorly mannered still get blackballed.

Being an outsider never looked so lucrative. In honor of the relative success of small cap equities investors, YCharts looked at a couple of their best picks in recent years and considered whether they're still worth buying. No, it is not venture capital investing. But with that kind of record, who needs it anyway?

It should be noted that the small cap sector typically yields lots of dogs and a few blowout gainers. To minimize risk, many investors choose putting money into small cap funds over picking individual stocks. Funds like those based on the Russell 2000 usually well-outperform venture capital funds. In the spirit of schadenfreude, however, we offer a couple of stocks in which individual stock pickers made out so much better than the well-connected.

Cardtronics ( CATM )

Cardtronics went public at the wrong moment, just in time for the sudden recession to take down its market cap nearly 90% to $52 million in 2008. But those who believed in its ATM business could hardly be happier now. The shares are up some 2,370% since then; about 138% in the past two years alone.

CATM data by YCharts

As is the case with many small caps, considerable debt leads YCharts Pro to give the company a mere average rating on fundamentals. But the company recently surprised the market with better than expected earnings and a ramped up forecast for the year. Eight out of ten analysts who follow the company recommend its shares now. Its income growth is seriously outstripping revenue growth now.

CATM Revenues TTM data by YCharts

Cedar Fair ( FUN )

Share price gains for Cedar Fair don't approach those of Cardtronics, but few investors would complain about nearly tripling their money in two years. Especially if they were used to those venture capital returns.

FUN data by YCharts

Cedar Fair has run amusement parks for decades, which of course has included the recent years that ran some of its competition into bankruptcy. But its recovery is looking better now.

FUN Revenues TTM data by YCharts

It's also one of the few small caps that offers a dividend - and a big one, at that. The dividend yield now is around 5.5%. YCharts Pro gives the company average marks for fundamentals and a good rating for share price value.

Dee Gill is an editor for the YCharts Pro Investor Service which includes professional stock charts , stock ratings and portfolio strategies .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: investing , Stocks

Referenced Stocks: CATM , FUN



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