Finding good stocks for small-cap funds may be trickier over the next few years, according to Ric Dillon, manager of the Diamond Hill Small Cap Fund, run by Diamond Hill Investments. "In the 27 years I've been in this business, this is the most difficult period I've ever had finding attractively valued U.S. equities," Dillon told Dow Jones Newswires.
Times have changed since the late 1990s, when investors were focused on technology and blue-chip stocks. Now, the valuation gap between those highly valued stocks and the rest of the pack has narrowed considerably, he said.
Dillon said he has trouble finding small-cap companies in certain sectors that are valued attractively enough, so his fund has far less technology and banking and finance holdings than the Russell 2000 index. Instead, Dillon is making his play with energy stocks, and has nearly maxed out the fund's limit of 25% energy company holdings.
However, Dillon cautioned that no one sector will provide a panacea for small-cap investors for the foreseeable future. "In the next five years, it will continue to be very difficult for U.S. equities, and there won't be any one group of stocks as a clear exception," he told Dow Jones.