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With the Small Cap Value fund category holding a good second spot in terms of Year to Date mutual fund returns, it would make great sense for people to be taking a keen interest in this category. The top-rated funds are found easily enough, but what about those small cap mutual funds that are not top-ranked but show some decent, tangible promise? Well, we found one such fund – the RBC Microcap Value Fund (TMVAX).

The RBC Microcap Value Fund Shows Great Future Promise

One of the ways that mutual funds are measured is on their risk-adjusted rates of return. This fund, with an astounding 395 securities in its portfolio, has had many years where it buried its competition based on performance and rates of return. But since 2003, there were two years where it underperformed and one of those years has left the 3-year compounded rate of return seriously negative.

In speaking about rates of return, the RBC Microcap Value fund has returned more than 13.2% (as at May 19, 2010), more than 3.5% better than the category. This says a lot; but its negative 39.5% return in 2008 has been hurting its long-term performance, which is likely the big reason behind Morningstar attributing a 2-star (low) rating to this fund.

As far as asset management and asset mix, the fund currently has a relatively low turnover rate at 17%, meaning it holds its positions for the long-term. This could be one reason why losses were so substantial in 2008 and why returns are finally starting to turn around and pick up in 2010. And since 84.3% of total assets are microcap, it makes sense — these were among the hardest hit assets when the markets corrected. Let’s take a closer look at those top asset classes:

At 19.3% of total assets, the Financial Services sector represents the fund’s biggest holding; Consumer Services at 15.1% and Consumer Goods at 13.8% represent the second and third top sectors, respectively.

With no single security representing more than 0.75% of the total portfolio, it appears that the RBC Microcap Value fund has adequate spread its risk. It further demonstrates that no single asset or asset class can by itself cripple the fund and destroy investor returns.

In reviewing those assets:

1. Consolidated Graphics (0.75%) represents the fund’s top holding. Having contributed 29.61% to the fund’s total return so far, this company’s security has been an aggressive asset for the fund to hold. As a Business Services firm, this company provides high quality printing services to corporations (annual reports, multi color brochures, etc.). Although demands for this type of service and product is highly volatile and seasonal, Consolidated has a solid customer base and has proven its ability to survive cutbacks in business spending. Compared to other business services firms, Consolidated has enjoyed three years of positive revenue growth, but its equity position has suffered on account of higher costs (in 2009). This becomes a speculative play.

2. Willis Lease Finance Corp (0.59%) holds the number 3 spot among the top holdings. As a business services firm, this company has yet to provide investors with positive returns. Year to Date, it has returned a negative 18.13%. In terms of revenues, Willis has remained relatively flat over the past couple of years, but it continues to report fairly stable net income and its equity position has grown thanks to smart asset choices. Although Willis remains in a negative cash flow position, its position as a provider of operating leases on spare commercial aircraft engines (aftermarket) will help it enjoy greater returns as cost-conscious airlines start spending more money on aircraft engines, airframe and engine components.

3. National Western Life Insurance (0.56%) is the first financial services firm in the portfolio. Although its Price to Earnings ratio is attractive, it has not performed at all year to date (to be precise, it returned -0.33%). In terms of its financial strength, National remains well positioned to take advantage of a recovery in the US market. With an equity position in the billions, the company has started to generate positive cash flow in 2009 and it is expected to continue into 2011. A growing asset base combined with well managed liabilities has helped keep total equity fairly high, even though 2008 saw revenues drop by over 13%. Although speculative in nature as a microcap financial services firm, National stands to benefit from the economic recovery currently underway and with its P/E ratio as low as it is, the security provides decent value within the RBC Microcap fund.

Without question, the RBC Microcap fund is the most aggressive and risky small cap mutual fund we have reviewed this month. However, its total asset allocation suggests that if the underlying assets have been properly researched and analyzed, the fund can stand to see continued, above-category level gains, particularly as more recovery from an economic standpoint happens. With this in mind, this mutual fund should be purchased only by investors with a higher risk tolerance who fully understand the risks.