Small-cap mutual funds lost $10 billion more in business than they gained during the first half of this year, despite a brief rebound by small-cap stocks, according to Financial Resources Corp., Boston. In contrast, net small-cap flows during the first half of 1998 were $8.5 billion.
Mutual fund companies are launching fewer new small-cap products these days, concentrating instead on managing the 400-plus choices already available.
But several small-cap funds that had been closed to new investors reopened this spring in response to the favorable market for that investment style.
Only nine new small-cap funds were launched in the first half of this year, compared with 26 in the first half of 1998, according to FRC data.
"I'm not sure the fund companies are starting as many products as they used to, in general," said Philip Edwards, managing director of Standard & Poor's Fund Services, New York. "They are dealing with an overwhelming number of products now and they may be focusing instead on corralling what they have, and consolidating their positions. I think they are re-thinking this now."
The Russell 2000 small-cap stock index was up 6.3% for the year as of July 31; comparatively, it returned -2.5 in all of 1998. In comparison, the Standard & Poor's 500 stock index was up 9% as of the end of July, and returned 28.6% in 1998.
Small-cap investments had been out of favor for three years in April when the market broadened to cast a little sunshine on them.
"There are tremendous opportunities to invest" right now, said David Kern, principal of Kern Capital Management LLC, New York, and portfolio manager for the $22.5 million Fremont U.S. Small Cap Fund. "The market still hasn't recognized the value of the growth opportunities for these small companies."
Most fund families already have active small-cap funds. It was a fluke that Minneapolis-based American Express Financial Advisors Inc. had to launch a new one in May, said Bob Richey, senior vice president of investment services for American Express Retirement Services.
"Two of our funds, the Discovery and the Progressive, had historically been small-cap growth and value, respectively. But the mandate changed and they became midcap funds, which left us without a small-cap product," Mr. Richey said.
American Express' new AXP Small Cap Advantage Fund uses a growth and value blend approach and already has nearly $200 million in assets under management, which are primarily retail. AXP is the new brand name for the former IDS Mutual Fund Group. American Express hopes to attract institutional investors as well once the fund's track record is established.
The fund is subadvised by Kenwood Capital Management LLC, Minneapolis, which represents another "fluke" for American Express. In an unusual move for the company, American Express took a majority ownership stake in Kenwood, founded in February by two former senior executives from Travelers Investment Management Co., New York, Kent Kelley and Jack Hurwitz. Kenwood also will manage institutional small-cap assets for American Express Asset Management, the company's institutional business unit.
Along similar lines, the new small-cap fund just launched by OppenheimerFunds, New York, was created to take advantage of new management talent, as well as to fill a product gap.
Officials at Oppenheimer reportedly wooed portfolio manager Chuck Albers frequently during his 25-year stint at Guardian Investor Services Corp., New York. Mr. Albers had co-managed about $6 billion at Guardian -- including the $3 billion Guardian Park Avenue Fund -- and created the Guardian Park Avenue Small-Cap Fund, which now has $93 million in assets.
Mr. Albers left both behind a year ago and joined OppenheimerFunds, primarily to manage the $8 billion Main Street Growth & Income Fund but with the understanding, sources said, that he also would launch an Oppenheimer small-cap fund.
The new Oppenheimer Main Street Small-Cap fund blends the value and growth approaches and will invest in companies with market capitalizations of up to $1.8 billion.
Fund co-manager Mark Zavanelli said the market cap, slightly above that of the Russell 2000's new $1.5 billion ceiling, gives the fund a little "wiggle room."
"This is a great time to launch a fund because small-cap underperformance is, by and large, behind us. Even though the rally has been a short-lived spike, it's encouraging, and it's a good time to start a performance record," he said.
Launch of the new fund both fills a product gap and takes advantage of a turning market, said Linda Moore, vice president and senior equity product manager.
Oppenheimer has three other small-cap funds, but the approach of each differs from that of the new fund, Ms. Moore said. The $1.1 billion Discovery Fund invests in small-cap growth companies; $39 million of its assets are from institutions. The $527.6 million Enterprise Fund, which is closed, invests in aggressive microcap firms. The $295.3 million Quest Small Cap Value Fund uses a strict value approach.
"This new one falls right in the middle," Ms. Moore said.
State Street Research & Management Co. re-opened its small-cap value Aurora Fund in May in response to market opportunities; the fund has opened and closed numerous times in recent years. Fund assets increased to $428 million as of July 31 from $385 million April 30.
Northern Trust Co., Chicago, plans to launch a small-cap growth fund in both the Northern and Northern Institutional fund families during the fourth quarter.
The offerings will fill a product gap and use the talents of a portfolio manager new to Northern, said Archibald King, vice president and director of product management.
Northern doesn't have another active small-cap growth fund. The existing $317 million Small Cap Fund is "more quantitative and value-like," Mr. King said. Northern's two other small-cap funds are index funds.
The fund will be managed by David Burshtan, who just joined the firm from Scudder Kemper Investments Inc., New York, where he managed about $700 million in small-cap assets.
Pension funds continue to hire small-cap managers at the same rate as last year, according to the Tracker data base of Eager Manager Advisory Services, Louisville, Ky.
During the first six months of this year, 76 managers were hired for allocations of active, domestic small-cap equity; about 34% of the 224 total hirings for active equity through June 30 were for small-cap assignments. For the same period last year, Tracker counted 64 small-cap manager hires, or about 33% of all active equity hirings.
