Each month in this column, experts will highlight mutual funds of interest to entrepreneurial investors.
Before making a big decision, most people want to evaluate all their options. Imagine, for example, going to purchase a new car but being shown only one-third of the autos that meet your specifications.
In the investment realm, it's all too easy to unintentionally limit your choices by not looking beyond U.S. borders when putting together a portfolio. True, a lot of world-class companies hail from the United States--but there are just as many top-notch offerings overseas.
You could argue that investment professionals with expertise in a particular region have an edge over those who attempt to cover a broader territory. Yet Smallcap World, a $6.6 billion mutual fund managed by a team of analysts and portfolio managers from Capital Research and Management in Los Angeles, has proved you don't have to specialize to perform well. Unlike funds that target foreign stocks exclusively--or, conversely, solely domestic equities--Smallcap World has the flexibility to invest in small-cap stocks wherever it sees fit. Since its inception in 1990, the fund has consistently stashed the largest chunk of its assets (roughly 50 percent) in U.S. stocks. But the rest are spread far and wide, in countries such as Australia, the United Kingdom and Hong Kong.
Over the past five years, the fund has been right on target, outperforming other world-stock offerings with similar investment objectives. Even more impressive, however, Smallcap World has been better at unearthing profitable small companies than many funds that specialize in the U.S. market. In the past five years, the fund has returned more than 14 percent annually--competitive with the returns of most U.S.-focused small-company funds. And while the fund's 1.13 percent expense ratio may be higher than some index funds, it is below average for a global fund.
The returns look even better when combined with Smallcap World's refreshingly low-risk profile. The fund looks pretty tame relative to most world-stock funds because it doesn't stray too far into the rocky arena of emerging-markets investing. Another reason for its stability--particularly relative to high-powered U.S. small-cap funds--has been its sizable cash position. As assets have grown steadily over the past several years, the fund has typically held up to 20 percent of its assets in cash.
It can be tough to find enough good stocks to buy when you've got more than $6 billion in your pocket. Yet Smallcap's mammoth size hasn't been a drawback. It continues to dig up stocks found in few other mutual funds, including such unlikely names as Yip's Hang Cheung Holdings (a company that supplies paints and solvents to manufacturers in Southern China) and Hummingbird Communications (a Canadian software development company).
Overall, the portfolio is tilted toward the service sector (31 percent of assets), where many small companies tend to be concentrated. By focusing on stocks that either dominate a small, local market or specialize in a niche product, Smallcap World's managers hope to tap into the entrepreneurial spirit. That, combined with Smallcap's ability to ferret out unusual, profitable stocks around the globe, makes this fund deserving of a closer look.
Tricia Rothschild is International Editor of the mutual fund research publication Morningstar Mutual Funds. The above opinions are those of the author and not of Entrepreneur. These investments vehicles may not be right for you. Carefully investigate beofre investing.
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