If America is facing an obesity epidemic, small-cap mutual funds are not immune, according to Morningstar commentator Todd Trubey.

But you can't judge a fund's health simply by looking at its total assets.

"A more accurate way to identify whether a fund has gotten too big for its manager to execute its original strategy is to compare its current level of concentration, market-cap statistics and turnover ratios to it's historic ones," Trubey wrote.

Using those factors, he tagged five too-big-for-their-britches funds he says investors might consider dropping from their investment portfolio diets.

Managers can address asset bloat in several ways, Trubey said.

"First, a manager can buy more stocks and make smaller bets on each of them. Second, they can own the same number of stocks in the same proportions, but buy stock in increasingly larger companies. Finally, the manager can move in and out of positions more gradually. This causes the fund's turnover ratio to drop," he wrote.

Trubey profiled five funds with asset bloat, and examined whether they might consider a diet. 

The Franklin Templeton Small-Mid Cap Growth Fund is one of Trubey's candidates. After the fund changed its name from Franklin Small Cap in September 2001, portfolio manager Edward Jamieson has been increasingly shifting to larger companies. "Maybe Franklin Mid-Large Cap would be a more appropriate moniker, as the fund devotes 13% of its assets to large caps but less than 10% to small caps," wrote Trubey.

Furthermore, the fund had an 88% turnover in 1996, when it had less than $1 billion, but now, the near-$10 billion fund has only 43% turnover and has increased its number of holdings from 95 to 137.

Turbey credits Jamieson with keeping a stable of able analyst to help. Still, he said, performance has suffered. "It's hard to give up on a once-strong fund, but if we owned this one, we'd sell and move on to something more promising. 

The Ariel Fund is also dangerously overweight, according to Trubey. The Chicago-based Ariel Management Company's fund is still smaller than some, but perhaps less healthy, said Turbey. With $4.8 billion in assets, manager John Rogers has maintained a trim portfolio, with only 40 stocks, but he is also piling assets into them. Turnover has remained low, but median market cap has swollen from $846 million in 1999 to $2.75 billion today, with 14% of total assets in small caps, Trubey notes.

Trubey considers Boston-based Columbia Acorn Fund "the most successful small-growth fund of all time."

Trubey said he is less concerned with this fund than the others. "While it's not technically closed, it now has a $75,000 minimum investment for new shareowners. That's a very high bar, and portfolio manager Chuck McQuaid reports that inflows have slowed substantially," Trubey reports.

Trubey also credits the stable turnover, between 20% and 35%, based on the fund's prior and founding manager Ralph Wagner's belief in buying small caps, and holding them tight, even as they grow, until their fundamentals are weak. 

"The fund's size hasn't harmed shareholders: The returns on its a shares land in the small-growth category's top decile over the trailing five-year period. We'd be surprised to see its success remain that lofty, but we wouldn't be surprised to see it continue to outperform. We'd hold on to this fund if we owned it.

The Royce Total Return Fund is trim and fit, said Trubey, due primarily to its dividend-paying-stock only diet. "Small-cap dividend-payers are more rare than large-cap dividend-payers, so manager Chuck Royce believes the former's yields are largely ignored--and hence there's a systematic mispricing.

"We'd prefer to see the fund smaller than its current $6 billion size," wrote Trubey, but  because the fund is conservative, relatively nimble, and tends to distribute inflows by increasing its number of holdings, "we would continue to hold this fund."

Finally, the T. Rowe Price New Horizons Fund invests in reasonably-priced stocks, and controlled growth "allows its funds to manage their girth better than aggressive, quick-trading funds," Trubey writes.  In the past decade, the fund has nearly doubled to $7.5 billion, after being closed from 1996 to 2002.

Trubey credits manager Jack LaPorte with keeping growth and turnover under control. 

"More than any other funds here, this one looks much like it did a decade ago. For that reason we would continue to hold the fund and would be willing to add more shares if our asset mix was still light on small-growth fare," said Trubey. 

The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.

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