By Scott Ronalds

“Small Caps will Outperform Soon.” I read this headline yesterday and it reminded me how different our approach to investing is than most other managers. The accompanying article suggested that investors’ appetite for risk is coming back and commodity prices are rebounding, which should drive up resource stocks. This in turn should benefit small-cap investors because these stocks are an area of heavy concentration in the small-cap market.

This is an interesting statement. It suggests that (1) all small-cap stocks have underperformed, (2) small-cap investors are heavily concentrated in resource stocks, and (3) rising commodity prices will benefit all small-cap investors.

Our Small-Cap Equity Fund has outperformed and is not heavily concentrated in resources. Indeed, while it owns some commodity-related stocks, it looks nothing like the market, and accordingly performs nothing like it. We’re the first to acknowledge that the fund’s performance will lag at times. If the article is correct in its prediction that commodity stocks are set to take off, it will likely trail its peers during the ascent.

Our funds look much different than the market. Our managers don’t feel obligated or compelled to build portfolios that look like an index. Rather, they focus on owning companies they feel are best positioned to grow shareholder wealth over the long term. The opening caption may excite index-oriented investors. To undexers, it’s just herd-speak.