T. Rowe Price Small-Cap Value Takes the Long View

Just the hint of tax cuts saved small-capitalization stocks from what might have been a ho-hum 2017. The stocks’ returns were underwhelming until the prospect of lower corporate taxes arrived in August. Since then, small-cap stocks have rallied, helping T. Rowe Price Small-Cap Value (symbol PRSVX, a member of the Kiplinger 25, our favorite low-fee funds, deliver an 11.6% gain over the past 12 months through December 8. That bests the small-company Russell 2000 index, and it surpasses 75% of its peers—funds that invest in inexpensive small-company stocks. (Large-cap stocks, up 20.5% over the past year, are still ahead.)

Fund manager David Wagner favors bargain-priced businesses with long-term growth potential. The combination isn’t easy to find. “If the stock is cheap, there’s a good reason,” says Wagner. “And if it’s a great, growing company, the stock is expensive.”

Wagner homes in on high-quality stocks that have stumbled temporarily or troubled companies with a catalyst to turn things around. And once he buys, he typically holds for the long term. The fund’s 22% turnover rate implies a typical holding period close to five years. By contrast, the average small-company stock fund has a 74% turnover rate, or a holding period of less than two years. (For more on stock market bargains, see 7 Bargain Stocks in Today's Pricey Market.)

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Some of Wagner’s picks take time to pay off. He scooped up shares in Green Dot, best known for its prepaid debit cards, in 2014 at prices ranging from $18 to $20. At the time, increased competition had crimped earnings. “We made no money on the stock for more than a year,” he says. After an activist investor stirred things up, the firm acquired competitors and renegotiated a key distribution contract. Earnings are back on track, and over the past year, Green Dot shares climbed 143% and recently traded at $61.

Then there’s Littelfuse, a maker of small electrical fuses for cars, which has been in the fund for 20 years. Demand for its products “exploded” recently, says Wagner, and the stock rose 28.6% over the past year.

After a rough 2015, the fund has been hot. Since Wagner took over in mid 2014, his 9.3% annualized return outpaced the 8.8% gain of the Russell 2000 index.