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Best 4 Small Cap Growth Mutual Funds for 2018

Small cap stocks are beginning to come out of a sustained downturn, and are expected to see double digit earnings growth over the next four quarters.  Sheraz Mian, Director of Research at Zacks, wrote a detailed analysts of small caps (click here to read the full article) where he points out the previous struggles of small cap stocks, the recent turn around, and future growth expectations.  As you can see in the chart below, over the past year, the S&P 600 has struggled, but beginning in Q317, growth has returned and is expected to see a big jump for the next four quarters.

Sheraz comments, “What this chart shows is that the earnings outlook for small-cap stocks is at an inflection point, with growth expected to ramp up materially going forward. This will be a major change from what we have become used to seeing over the last couple of years. This should help support and drive small-cap stock prices going forward.”

Moreover, this growth is expected to boost total dollar earnings growth too, as you can see in the chart below.

It is also important to point out that these growth numbers are not accounting for any new tax changes.  According to Sheraz, “One additional factor to keep in mind is that these favorable expectations don’t incorporate the impact of tax cuts that Congress is currently contemplating. Tax cuts will be a big boost for small-cap stocks, much more than is the case for large-cap stocks. The reason for that is the largely domestic orientation of these companies.”

Given all of this positive data, we wanted to identify the best small cap mutual funds to take advantage of this expected uptick in the sector.  First, we started with the Zacks Mutual Fund Screener, and looked for funds that had at least 90% exposure to small cap stocks, a low expense ratio, no load fees, 1 year total return of +20% or better, and a Zacks Rank #1 (Strong Buy), or a Rank #2 (Buy).  From the results, we picked the top 4 (out of 7 that met these criteria).

The Picks

Columbia Small Cap Growth Fund (CSGYX), a Zacks Rank #1 (Strong Buy), seeks capital appreciation. The Fund will focus on growth stocks. The Fund will invest at least 80% of its net assets in stocks of companies with a market capitalization, at the time of initial purchase, equal to or less than the largest stock in the Standard & Poor's SmallCap 600 Index.

Current Sector Allocation:  As of the last filing, the company has the most sector exposure in the following; Technology 33%, Healthcare 22%, Consumer cyclical 13.45%, and Industrials 10.75%

Cost Specifics: There is no minimal initial investment requirement, it has a 0.87% management fee with a total expense ratio of 0.93%.

Performance and Management: The YTD return is +22.42%, 1 year +26.36%, 3 year 16.49%, and 5 year +13.67%.  The fund is team managed with Wayne Collette, managing Director of Columbia Management Advisors, as the lead.  Wayne holds a M.B.A. in finance from the Columbia Business School at Columbia University.

Top 5 Holdings: As of the most recent filing, the top positions are held in Six Flags Entertainment, LendingTree, Paycom Software, Veeva Software, and Home BancShares.

Dreyfus Select Managers Small Cap Growth (DSGIX), a Zacks Rank #2 (Buy), seeks capital appreciation. To pursue its goal, the fund normally invests at least 80% of its assets in the stocks of small cap companies. The fund currently considers small cap companies to be those companies with market capitalizations that fall within the range of companies in the Russell 2000 Growth Index.

Current Sector Allocations: As of the last filing, the company has the most sector exposure in the following; Technology 28.59%, Healthcare 23.16%, Industrials +15.55%, and Consumer cyclical 13.41%.

Cost Specifics:  There is a $1,000 minimal investment requirement, it has a 0.9% management fee with a total expense ratio of 1.01%.

Performance and Management: The YTD return is +19.06%, 1 year +21.48%, 3 year 10.02%, and 5 year 11.8%.  The fund is team managed with Amy Croen, co-president, chief compliance officer, and portfolio manager, as the lead.  Amy holds a M.B.A. from the Columbia Business School at Columbia University, and is CFA certified.  

Top 5 Holdings: As of the most recent filing, the top positions are held in Ligand Pharma, Supernus Pharma, Stamps.com, iShares Russell 2000 ETF, and LCI Industries.  

Principal Small Cap Growth Fund (PGRTX), a Zacks Rank #2 (Buy), seeks long-term growth of capital. The Fund invests at least 80% of its net assets in equity securities of companies with small market capitalizations. The Fund invests in growth stocks, emphasizing buying stocks of companies whose potential for growth of capital and earnings is expected to be above average.

Current Sector Allocations: As of the last filing, the company has the most sector exposure in the following; Technology 28.59%, Industrials 18.74%, Healthcare 17.74%, and Consumer cyclical 12.47%.

Cost Specifics:  There is no minimal investment requirement, it has a 1.08% management fee with a total expense ratio of 1.02%.  

Performance and Management: The YTD return is 19.86%, 1 year 22.54%, 3 year 12.46%, and 5 year 13.94%.  The fund is team managed with James Fennessey, Vice President, as the lead.  James has a B.S. in Business Administration, with an emphasis in Finance, and a minor in Economics from Truman State University, and is CFA certified.  

Top 5 Holdings: As of the most recent filing, the top positions are held in Waste Connections, Bright Horizons Family Solutions, Blackbud, Catalent, and Cogent Communications.  

MassMutual Select Small Cap Growth Equity (MSGZX),a Zacks Rank #1 (Strong Buy), seeks long-term capital appreciation by investing primarily in common stocks and equity securities of smaller companies that have potential for long-term growth. The Fund may maintain cash reserves for liquidity and defensive purposes.

Current Sector Allocations: As of the last filing, the company has the most sector exposure in the following; Technology 25.25%, Industrials 16.74%, Healthcare 16.42%, Consumer Cyclical 12.25%, and Financial Services 11.11%.  

Cost Specifics: There is no minimal investment requirement, it has a 0.80% management fee with a total expense ratio of 0.86%.

Performance and Management: The YTD return is 17.9%, 1 year 20.71%, 3 year 9.89%, and 5 year 13.91%.  The fund is team managed with Kenneth Abrams, Senior Managing Director and Equity Portfolio Manager, as the lead.  Kenneth has a MBA and his BA from Stanford University.  

Top 5 Holdings: As of the most recent filing, the top positions are held in HubSpot, 2U Inc., Entegris, Insulet, and Western Alliance Bancorp.

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