Despite the new environment of market volatility and uncertainty about the direction and frequency of interest rates, Virtus KAR Small-Cap Growth Fund (PXSGX) has posted an impressive 40.8% return for the 12 months ending March 30, compared to the 17.1% return for the S&P 500 and 19.9% return for the entire small-cap growth funds sector as measured by Lipper.
Not only did the fund post enviable overall gains for 12 months, it also posted a 2.2% return for the final four weeks of that period. This short-term performance is notable because the last month of the new quarter was an especially unstable and tumultuous time for the whole market, which saw the first quarterly loss for the S&P 500 since 2015.
The Virtus KAR fund seeks to generate attractive risk-adjusted long-term returns by investing in the stocks of U.S. small-cap growth companies with durable competitive advantages, excellent management, lower financial risk and strong growth trajectories.
How did the fund turn in such superior returns in the midst of concerns about a trade war with China and the likely direction of the yield curve that hung over the market for the past year? In a word, by being disciplined. Virtus KAR's managers ignored the political and macroeconomic factors that caused consternation among many investors and instead adhered to their value investing principles by looking for those companies that had solid fundamentals and good prospects for growth.
“A lot of people have underperformed because they have made too big a deal about macro factors, from the Federal Reserve to Trump,” Doug Foreman, chief investment officer of the fund, said in an interview with the Wall Street Journal. According to Foreman, by letting themselves become distracted by these extraneous and, in terms of finding bargains, irrelevant factors, many investors have overlooked fundamental changes and significant financial improvements in companies that are responsible for fueling growth.
The fund is authorized to invest 20% of its assets in foreign companies, some of which have helped boost the funds impressive returns. One of its picks has been a stellar performer. China’s Autohome (ATHM, Financial), which runs the country’s major automotive-centered website, was trading as low as $20 in 2016. Fund manager Todd Beiley took a position in the momentarily distressed company and benefited handsomely when the stock recovered to $65 by the end of 2017. It now sells for $88. Autohome represents 9.19% of the fund’s holdings.
Beiley acquired another position in a stock he felt was undervalued. For $37 a share, the fund purchased shares of Interactive Brokers (IBKR, Financial), a low-cost discount broker that Beiley believes is poised to expand. The stock price has climbed to $67. Shares of the company represent 4.25% of the fund's holdings.
The major sector allocations for the fund are: Technology at 29.41%; Consumer Discretionary, 20.6%; Financial Services, 18.86%; Producer Durables, 16.55% and Health Care at 7.48%.
Disclosure: I have no positions in any of the securities discussed in this article.
