This $933m (£605.3m) offering from T Rowe Price is run by manager Frank Alonso, who took the helm in 2013.
He invests in the securities of US smaller companies that have a market capitalisation that falls within its benchmark, the Russell 2500 index.
He says: “Not everyone is familiar with that benchmark. It’s the Russell 2000, then it’s the next 500 companies up in market cap. So it’s a small and mid [cap] blend. Generally, market caps going up to roughly $10bn.”
Mr Alonso refers to his strategy as “playing all over the field”.
“What I mean by that,” he explains, “is we really go hunting in what we call the tails of the market – it’s the extreme growth, it’s the extreme value.
“I think a lot of funds like to play in the middle of the field and there’s nothing wrong with companies that fit in the middle of the field. We just don’t think a portfolio comprised predominantly of those types of companies is going to produce significant alpha over a long duration.”
He believes his approach allows him a “more expansive view” of what constitutes a good company. “So what we’re trying to do is look for companies that we think are underappreciated,” he notes. “We consider the philosophy of the fund as contrarian – contrarian can apply to both growth and value situations.”
The manager cites an example on the growth side where a company trading at 20 times earnings may appear expensive and be written off by the market.
He adds that the stock appears to be priced at 24 times earnings (when using the market’s expected earnings). His research leads him to believe that the growth is actually stronger than the market expects. Using T Rowe Price’s expected earnings, the stock is actually priced at 20 times earnings.
He goes on: “We’re always looking for companies where we think perception is wrong in growth and value. We think that’s what sets the strategy apart and helps us to have consistently good alpha with a beta that’s moderately less than the market.”
Mr Alonso says he does not let his strong macroeconomic views influence portfolio construction and that his approach is strictly bottom-up.
“We own a company called Chesapeake Utilities and they deliver propane to people in rural markets who don’t even have gas lines running into their homes,” he notes. “I don’t really care what interest rates are doing. I own that company because I think it’s a really unique asset.”
According to the key investor information document, the fund is a level six on a risk-reward profile, with ongoing charges of 1.12 per cent applying to its clean ‘Q’ share class.
The fund has delivered a stellar performance, both in the long term and more recently. In the past 12 months to February 24 it delivered a 19.79 per cent return, ahead of the Russell 2500 at 17.29 per cent, while the IA North American Smaller Companies sector average is just 14.04 per cent, FE Analytics shows.
Over 10 years to February 24 the fund has clocked up an impressive 219.84 per cent return for investors, against the index’s 189.52 per cent rise and the 176.82 per cent generated by the sector.
For the manager, surfing apparel company Quiksilver was the “biggest headache” in the fund last year and the largest detractor from performance.
He explains: “The company could go bankrupt… but we think it is headed in the right direction. We’ve actually added to it as it’s been weak.”
Turning to his outlook for US smaller companies, the manager remarks that the US is currently considered a good place to be invested versus the rest of the world.
He adds: “I don’t think growth in the US will be as robust as people anticipate. I think the world is interconnected and while we may fare better than other parts of the globe, I think expectations are a little bit high here. The good news is that we’ve seen it come down over the last 90 days, so it’s starting to get digested into the market.”
Ellie Duncan is deputy features editor at Investment Adviser
EXPERT VIEW
Darius McDermott, managing director, Chelsea Financial Services
Managed by Frank Alonso out of Baltimore, this fund invests in a blend of growth and value stocks of small-cap companies. Working alongside T Rowe’s highly regarded small-cap research team, the fund seeks to discover unloved companies that have clear business plans with financial flexibility and proven management teams. The fund has a low turnover and a patient trading strategy and is a good choice for investors seeking exposure to companies powering the world’s engine of growth.
