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The small cap growth category is an interesting one. Since small cap mutual funds are an interesting breed to begin with, investing in small cap growth funds implies less risk in a category that is abundant with risk anyway. The Wells Fargo Advantage Small Cap Growth fund illustrates just how it can be that a small cap fund can be less risky than others in its category.

The Wells Fargo Advantage Small Cap Growth fund illustrates how you can have less risk in a category that has an abundance of risk.

Starting with rates of return, the Wells Fargo Advantage Small Cap Growth fund has outperformed the Index every year since 2003 except in 2008. It has outperformed its category every year since 2003 except in 2008. And up to April 30, 2010, it has also outperformed. Each year’s performance has deviated wildly from the Index, meaning that in all but one year, it provided exceptionally greater returns than the Index and Category.

The reverse is true for that one year, in 2008, when it underperformed.

Yet on a 10-year basis, Morningstar considers the fund’s returns as just “average.” (Overall, and its 3 and 5 year returns are considered Above Average, High, and High, respectively).

Wells Fargo Advantage Small Cap Growth has taken a clear position with its portfolio make up.

When it comes to this small cap fund’s portfolio, it is evident that this Wells Fargo fund has taken a clear position in certain securities. With just 104 stock holdings, the fund can be considered average in its size. With 69% of its total $ under management invested in Small Cap, this fund has remained true to the Small Cap Growth sectory. The fund also invests 21% in Micro Cap and another 10% in Medium cap securities to round out the portfolio.

Most small cap funds that we have seen this month have spread the risk equally among different sectors. Wells, on the other hand, is pretty deep into Business Services with 23.6% of holdings. The second largest sector is Healthcare at 16.8%, and the third largest is Software at 11.3%.

In terms of individual holdings, the Fund’s Top 10 (22.4% of total holdings) consists of just one Business Services firm, one Healthcare firm, two software firms, and three Consumer Services firms. Interesting approach, one that has worked well for the fund.

The three top picks we will examine are GSI Commerce, Gartner Inc., and Live Nation.

GSI Commerce (2.97%).
At nearly 3% of total holdings, GSI represents a fairly significant holding. So what does GSI do, exactly? Well, it creates and operates over 100 e-commerce websites for retailers, manufacturers, entertainment companies, etc. It earns revenues from sales made through these sites, earning a commission for each transaction. This business model has proven profitable. This company has earned 3 years of consecutive year-over-year growth. This company also generates good cash flow that is nearly 3 times greater than it was previously. As a “Software” company, there is little reason to question why GSI makes up such a large percentage of the fund’s total holdings.

Gartner, Inc. (2.62%)
Gartner provides analysis and forecasts for IT planning for companies that would prefer to outsource this task. Overall, they provide a valuable service, mostly to chief technology officers and chief financial officers to help budget for IT programs. However, with the economic slowdown, such services have not been in high demand. With that said, Gartner has been able to maintain a relatively stable revenue level as well as maintain their equity level. For firms in this space, Gartner is definitely the one to own.

Live Nation (2.08%)
Live Nation is the sixth largest security holding in the Wells portfolio. Considered Medium Cap, Live Nation is the world’s largest event host, owning booking rights to over 155 venues. The company generates revenues in excess of $4 Billion. However, the past few years have seen net losses to the tune of $350 million in 2008 and $7 million in 2009. With such a strong equity position, the company is likely to recover nicely once the economy gets back on track.

The top holdings outlined above are pretty strong, although some uncertainty is worth noting on the Live Nation holding. Overall, the Wells Fargo Advantage Small Cap Growth fund has certainly invested a lot of attention in picking its top holdings. This small cap mutual fund, while lower in risk overall than many others surveyed here at the Mutual Fund Site, would be best suited to a growth oriented investor who refused to hold value equities and who needs to fill a somewhat larger gap (say 10% to 15%) in their equity space and needs a small cap fund to achieve that.