T. Rowe Price Small-Cap Value Reopens
Monday, July 14, 2008; 12:00 AM
Yet another venerable fund has reopened its doors to new investors. After being shut for six years, T. Rowe Price Small-Cap Value quietly began accepting new money in May.
With assets of $5.2 billion and 300 stock holdings, Small-Cap Value is a large small-company fund. Preston Athey has run the fund (symbol PRSVX) since August 1991, and he's run it skillfully. Over the past ten years through June 30, the fund returned an annualized 10% -- an average of 4.5 percentage points per year better than the Russell 2000 index of small-company stocks and two and a half points per year ahead of the Russell 2000 Value index.
Athey says the breadth of his holdings helps dampen the portfolio's volatility, which is lower than that of the Russell 2000. "I believe in having a broadly diversified portfolio with representations in nearly all industries," he says. "I'm not smart enough to tell you what the best sectors will be the next two years."
Athey reduces risk in the portfolio by avoiding heavily indebted companies. Outfits with weak balance sheets are especially vulnerable in unforgiving financial markets of the sort we're experiencing today. Small-Cap Value is down 6.7% year-to-date through July 9, but, as is typical for the fund, it's down much less than the index in a bearish market (conversely, this fund typically lags the index in raging bull markets).
As a value-oriented investor, Athey generally looks to add to sectors that are out of favor and sell down what's doing well. For instance, he's been gradually reducing the weight of energy stocks in his fund over the past year while bumping up financial holdings. It's not that he's bearish on oil and metal prices -- he's not -- but he thinks it's prudent to take profits in holdings that have had huge run-ups, such as Cleveland Cliffs ( CLF), Whiting Petroleum ( WLL) and Encore Acquisition ( EAC). The latter two were still top-ten holdings as of June 30.
Similarly, he's not a huge bull on the financial sector, but he likes the valuations of some companies he figures will be survivors of the financial storm. The key is to identify the ultimate survivors. "We will see some bank bankruptcies," says Athey. "But just like in 1990, when we had the last big real estate crisis, the system will bend but not break. When the sky is falling, you have to have the guts to buy -- but buy slowly."
One financial stock he's bought lately is Hatteras Financial ( HTS), a mortgage real estate investment trust that recently went public. Athey likes that the REIT is well capitalized and invested in "supersafe mortgages, which are 100% guaranteed by agencies."
He also favors Montana's Glacier Bancorp ( GBCI), which avoided the stupid lending practices that plagued the U.S. banking industry. Montana's economic base of agriculture, mining and retirement communities appeals to Athey, who's based in Price's Baltimore headquarters.
Another financial stock he owns is Ares Capital ( ARCC), a business-development company whose stock yields an enticing 17% and sells for less than book value (assets minus liabilities). The market obviously believes the dividend will be cut, but Athey thinks the company will be okay because it reduced risk during the leveraged-buyout boom and focused on loans with higher seniority.
One legitimate question is whether small-cap value is the right place to invest your money these days. The characteristically candid Athey says he finds growth somewhat more attractive than value: "If it's an asset-allocation question, I personally believe you should tilt toward growth, maybe 60% to 40%, but not 100%."
This is a fine core small-cap fund for the long-term investor. The low 11% annual turnover rate helps make it suitable for taxable accounts. Annual expenses are a reasonable 0.82%.