Mutual Fund Site

The Franklin MicroCap Value Fund (FRMCX) is one of those top performing funds that has stuck to its strategy over the past ten-plus years and, as a result, has been able to provide investors with great returns. As a Small Cap Fund, this Franklin fund is a steady performer, something that not all mutual funds are able to achieve by remaining so focused and dedicated to their asset mix.

What strikes the Mutual Fund Site as particularly interesting about this fund is exactly that: it’s dedication to the micro cap asset class. With roughly 84.3% invested in such assets, it would seem difficult to achieve consistent year over year returns, yet in the last ten years (the period between 2000 and 2010) it has only underperformed the S&P 500 two times, once in 2007 and again last year, in 2009.

The reason for 2009 under-performance will have a lot to do with the type of stocks that saw gains — lower quality small caps, for example. But Franklin might just be on to something here with their MicroCap fund.

Perhaps the one area that might concern some people is the actual asset mix, with 26.7% invested in Consumer Goods, 22.1% in Industrial Materials and 21.9% in Business Services. The good news is that the fund has properly diversified its holdings so that the risk has been adequately spread across these three key areas that are obviously a focal point for the fund.

The Top 3 holdings of the funds are equally interesting. Since the fund owns just 77 securities and the portfolio turnover is quite low at just 11% according to Morningstar, choosing the “right” companies becomes a tremendously important, and difficult, task for the fund.

Seneca Foods 4.3%
Seneca Foods supplies processed fruits and vegetables to a domestic (US) market. They remained profitable over the past three years, a difficult feat considering how badly the economy was beaten down in 2008 when consumers might have otherwise opted for often-cheaper fresh foods.

Sales for 2010 are expected to be released some time in May 2010.

As a financial entity, Seneca has only increased and improved its equity position through retained earnings and keeping tight control over expenses.

Healthcare Services Group 3.46%
Healthcare Services provides housekeeping and food services to nursing homes, rehabilitation facility and hospitals through the United States. With their services in growing demand, Healthcare Services Group continued to remain profitable over the past couple of challenging years, each year enjoying higher sales numbers and achieving a record year in 2009.

Their balance sheet remains strong, however a spike in short-term liabilities (accounts payable) is worth keeping an eye on for the year to come. It is unlikely that this is not something that Franklin has looked at in greater depth.

SFN Group Inc 3.4%
SFN Group is a staffing company that provides professional and regular staffing solutions for companies in Canada and the US. As can be expected, the company was impacted by the economic slowdown over the past couple of years. This has resulted in weaker financial position, but the company has managed their balance sheet well, reducing liability by nearly 50% from 2007 levels.

Income has also taken a hit with a 2009 loss of over $6 million (compared to a loss of $118 million in 2008). Much will hinge on its First Quarter of 2010 results which are expected any day now.

Of the three top holdings, SFN is quite likely the most uncertain. However, with the economy turning around and demand for skilled and professional workers climbing, revenues are expected to recover as well. And given the company’s smart financial management, as demonstrated over the past few years, this could bode well for the Franklin fund.

Overall, the Franklin fund has a lot to celebrate. An excellent track record while staying true to its identity as a true microcap fund speaks well for the fund manager who has been heading up this fund since 1995.

As well, Morningstar rates this fund as low risk, the lowest risk profile among its peers. Returns have been good with YTD returns over 18%.

On the negative side, those hefty returns are considered just average. Also, heavy investments in business services could backfire on the fund if the economy does not continue to grow or improve.

This fund is best suited for someone with a low to medium risk tolerance who needs additional asset class diversification and is willing or eager to get into a small cap fund to fill such a need. Given the lower risk profile and the strong historical performance, the Mutual Fund Site rates this as a smart investment for that specific type of investor.

For investors with greater risk tolerance and who want something more aggressive, there are other Small Cap funds that may be more appealing.