5 Top-Performing Small-Growth Funds

Even as the overall US stock market continues to post solid gains, funds focused on small-growth stocks are lagging. But some are posting strong results, with a few beating the market.

The small-growth funds posting better returns than the overall market over the past year include Baron Small Cap BSCFX, which has returned 29.06%, and Fidelity Small Cap Growth FOCSX, up 28.18%. To screen for the top-performing funds in this category, we looked for those with the best returns over the last one-, three-, and five-year periods.

• Baron Small Cap Retail BSCFX
• Fidelity Small Cap Growth K6 FOCSX
• Invesco Discovery A OPOCX
• T. Rowe Price Integrated US Small-Cap Growth Equity Fund PRDSX
• Wasatch Core Growth WGROX

Small-Growth Fund Performance

With inflation remaining higher than the Federal Reserve would like, small-cap stocks have been struggling under expectations that interest rate cuts are unlikely until later this year. Many see the fortunes of small-company stocks as closely tied to the US economy, which has led to these funds performing worse than the overall stock market.

So far in 2024, the average small-growth fund is up 3.16%, more than 7 percentage points behind the Morningstar US Market Index. The gap is even larger over the last 12 months, with the average small-growth fund up 16.11%, compared with a 27.02% gain in the US market. Over the last three years, small-growth funds are down an average of 3.82% per year, while the stock market is up just shy of 8% per year.

What Are Small-Growth Funds?

Small-growth funds invest in stocks in the bottom 10% of capitalization in the US equity market. Growth is defined based on fast growth (high growth rates for earnings, sales, book value, and cash flow) and high valuations (high price ratios and low dividend yields). Small-growth funds tend to focus on up-and-coming industries or young firms whose stocks can be more volatile but also hold the potential for higher returns over the long term.

5 Top-Performing Small-Growth Funds

To screen for the best-performing funds in this category, we looked for the ones that posted top returns across multiple periods. We first screened for those ranked in the top 33% of the category using their lowest-cost share classes over the past one-, three-, and five-year periods. In addition, we screened for funds with Morningstar Medalist Ratings of at least Bronze. We also excluded funds with less than $100 million in assets. Five funds made the cut. This group only consists of active funds.

Because the screen is created with the lowest-cost share class for each fund, some may be listed with share classes not accessible to individual investors outside retirement plans. The individual investor versions of those funds may carry higher fees, which reduces returns to shareholders.

Top-Performing Small-Growth Funds

Top-Performing Small-Growth Funds

Baron Small Cap Retail

• BSCFX
• Morningstar Medalist Rating: Silver
• Morningstar Rating: 4 stars

The actively managed Baron Small Cap Fund is up 27.70% over the past year, outperforming the average fund in the small-growth category, which rose 16.11%. The $4.5 billion fund has gained 0.19% over the past three years, while the average fund in its category is down 3.40%. Over the past five years, the Baron Capital fund has climbed 10.79%, compared with the 8.79% gain for the category.

“A key factor distinguishing Cliff Greenberg and much of the Baron team from other growth investors is a longer time horizon. The firm preaches patience with its investments and seeks out stocks capable of maintaining their growth such that their prices can double over five years. The strategy’s low portfolio turnover—typically below 20% annually—stands out in a category where turnover often is twice as high.”

—Adam Sabban, senior manager research analyst

Fidelity Small Cap Growth K6

• FOCSX
• Morningstar Medalist Rating: Silver
• Morningstar Rating: 4 stars

Over the past year, the actively managed Fidelity Small Cap Growth K6 Fund rose 27.09%, while the average small-growth fund gained 16.11%. The $2.4 billion fund has climbed 1.36% over the past three years, outperforming the average fund in its category, which fell 3.40%. Over the past five years, the Fidelity fund is up 11.57%, while the average fund in its category is up 8.79%.

“Manager Patrick Venanzi seeks growing small-cap businesses with market capitalizations between $100 million and $5 billion and strong competitive positions in expanding markets. He focuses on earnings estimates and expectations, looking to find future small-cap winners whose earnings potential isn’t fully recognized by the market. Approximately 75% of assets are allocated to established growth companies, which are stable with strong financial track records, while about 25% of assets are allocated to emerging companies, which are less profitable and more speculative.”

—Eric Schultz, manager research analyst

Invesco Discovery A

• OPOCX
• Morningstar Medalist Rating: Silver
• Morningstar Rating: 4 stars

The $4.4 billion Invesco Discovery Fund rose 23.57% over the past year. The gain on the actively managed fund beat the 16.11% gain on the average fund in the small-growth category. Over the past three years, the Invesco fund is down 1.00%, while the average fund in its category is down 3.40%. Over the past five years, the fund has climbed 11.79%, compared to the 8.79% gain for the category.

“He and his team start by looking through the small-cap universe (stocks with market caps of $1 billion-$10 billion) for firms with accelerating but consistent growth rates—generally at least 10% sales growth and 15% earning growth. This narrows the universe down to 350 stocks for intensive research. The team tries to identify niche leaders in structurally attractive industries with proven management teams and strong growth prospects, driven by such factors as innovation, growing market share, or new product cycles.”

—David Kathman, senior manager research analyst

T. Rowe Price Integrated US Small-Cap Growth Equity Fund

• PRDSX
• Morningstar Medalist Rating: Silver
• Morningstar Rating: 4 stars

Over the past year, the actively managed T. Rowe Price Integrated US Small-Cap Growth Equity Fund rose 20.62%, while the average small-growth fund gained 16.11%. The $8.1 billion fund has climbed 2.02% over the past three years, outperforming the average fund in its category, which fell 3.40%. Over the past five years, the T. Rowe Price fund is up 9.79%, while the average fund in its category is up 8.79%.

“New comanagers David Corris and Prashant Jeyaganesh will not make wholesale changes to this portfolio. They will still use the models employed by departing manager Sudhir Nanda, which primarily emphasized valuation and quality factors when determining which stocks to invest in. They will, however, formally include T. Rowe’s analyst stock ratings in their stock-selection model, which is a change from Nanda, who relied on analysts mainly for biotech picks. Adding forward-looking analyst ratings should help the model better discern quality in companies, as backward-looking data can be skewed for a number of reasons. Going forward, the model will be roughly speaking 35% valuation, 30% quality, 15% momentum, and 20% analyst ratings.”

—Jack Shannon, senior manager research analyst

Wasatch Core Growth

• WGROX
• Morningstar Medalist Rating: Gold
• Morningstar Rating: 5 stars

The $4.2 billion Wasatch Core Growth Fund rose 25.88% over the past year. The gain on the actively managed fund beat the 16.11% gain on the average fund in the small-growth category. Over the past three years, the Wasatch fund is down 0.17%, while the average fund in its category is down 3.40%. Over the past five years, the fund has climbed 11.28%, compared to the 8.79% gain for the category.

“Wasatch excels in small-cap equity research. Its teams mix sensible screens with rigorous, careful analysis. Here, Wasatch’s 18-member domestic equity squad focuses on U.S. companies with market caps from $500 million to $5 billion at purchase. Simple DuPont analyses (breakdowns of companies’ financial metrics) help the team target profitable, competitively advantaged firms. It also looks at companies likely to benefit from long-lasting industry or economic trends.”

—Tony Thomas, associate editor of equity strategies

Long-Term Returns of Top-Performing Small-Growth Funds