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Finding Success in Active Small-Cap Funds

Finding Success in Active Small-Cap Funds

May 3, 2023

Active management continues to generate positive headlines, especially when looking beyond large-cap stocks.

A recent MarketWatch article profiled the success that one fund is having investing in small-caps.

The article profiles the SouthernSun Small Cap Fund, pointing out that SouthernSun shows how actively managed funds can be sharply differentiated from the index, and in turn deliver outperformance for investors.

The active share of the SouthernSun Small Cap Fund was 98.8% as of December 31, 2022. The higher the active share, the more differentiated from its benchmark and the more active a fund is.

Co-manager Phillip Cook tells MarketWatch, “You need managers that think and behave differently and generate idiosyncratic returns. An active manager needs to supplement the index, rather than look like it.”

Cook also points to the ability of active managers to get in-depth with a company to check on its investment potential. Cook says his team attends trade shows to seek out potential investments, then meets with management, and builds its own model before making an investment. Such due diligence is an important service provided by active managers — and it’s especially important when investing in small-cap stocks, which are a less-analyzed part of the equity market than their large-cap and mid-cap peers.

The SouthernSun Small Cap Fund Class I returned an average of 25.3% over the three years, while the SouthernSun Small Cap Fund Class N returned an average of 25%. That compares to a 13.8% return for the Russell 2000 and a 17.8% return for the S&P Small Cap 600 over the same period.

Cook said his firm will typically hold a small-cap stock investment for seven to 10 years, but that they have held several for even longer periods.


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