Mutual Fund Site

Very few small cap mutual funds can defy gravity. There are several reasons why this niche should expect trouble in 2010, based primarily on the fact that with weaker financial statements, obtaining credit at all (or at reasonable rates if they can) makes growth strategies difficult for small cap companies to execute. This makes investment management difficult for people working this field.

However, the Mutual Fund Site sees one Small Cap Fund that has been able to defy gravity… and the expectation is that this particular fund will continue to outperform the index and category heading into 2010.

So, what fund are we talking about?

How about the Pinnacle Value fund (PVFIX). When markets tanked in 2008, this fund was able to hold its own, significantly outperforming the index and category. For 2009, this has meant muted returns, so investors who got in just last year might be a little disappointed. However, for long-term investors who have stayed the course, this fund has clearly put big smiles on many faces.

Where we see Pinnacle Value continue to shine is in its asset allocation model, specifically in the Financial Services sector. This fund invests more than 2 times more funds in this sector than the category as a whole. It seems that the fund sees tremendous opportunity here, possibly because small-cap financial institutions were not subject to the same regulatory strong-arming that some of their mega and large-cap counterparts. As well, small cap financial institutions do not play in the same high-risk sandbox where some of the big players play. This means many of these companies are subject to reduced financial risk.

Another area where the Pinnacle Value fund is overweight compared to its category is in the Energy sector, an area that provides ample growth opportunities for the small cap companies in terms of research and development. And if R&D does not catapult a small cap energy company into the big leagues, then there is plenty of inflated buyout opportunities that will benefit the funds holding it. This is particularly true in periods of government stimulus as well as general economic growth. (Think of those small cap tech companies in the late 90’s and the inflated opportunities they presented to large conglomerates like Time Warner, Yahoo!, Microsoft, among others).

Additionally, the Pinnacle Value fund shows low asset turnover. This suggests that they are committed to their strategy and this, of course, provides a great deal of comfort for the individual investor.

But one of the key factors influencing our choice is that Pinnacle Value held roughly 50% of its assets in cash, a clear sign that they are preparing to go on a buying spree if some of their stronger, existing holdings should become devalued or if the winds of opportunity shift in the near future.

As far as investment management is concerned, this fund has performed rather well historically and recently. With its low risk rating according to Morningstar, its good cash position as well as its fundamental approach to investment selection, this fund will clearly continue to defy gravity in 2010. In the arena of small cap mutual funds, the Mutual Fund Site will take Pinnacle Value any day this year!