Fund profile: Van Kampen Small Cap Growth Fund A

Ann C. Logue | Aug 13, 2008 6:20am EDT | Comment

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www.vankampen.com
(MUTF:VASCX)
Inception date: Nov. 27, 2000
Fund managers: Matthew Hart, Justin Speer
YTD performance: -11.56%
Morningstar category: Small Growth
Morningstar rating: Five Stars

Money managers have long known that certain types of stocks perform better than others even though academic research shows that shouldn’t be the case. Hence, it was remarkable when Ken French and Eugene Fama published their three-factor model back in 1995, which showed that stocks with low price-to-book values and those with smaller market capitalization values outperformed the market in general. What made their research especially noteworthy is that Fama developed the “efficient markets” hypothesis, which said that small-cap stocks should not have an advantage in the market. He came around when the data showed his original theory to be incomplete.

Thirteen years later, the Van Kampen Small Cap Growth Fund is trying to capitalize on the relative advantage that smaller companies have in the market. Of course, the market these days has not been cooperative for stocks of any capitalization. For those who like the buying opportunity being presented, this fund has a strong record that should carry it through whenever the market improves.

The prospectus states that the fund invests in small companies, but it does not define what that means. The fund management seems to use Morningstar’s small-cap style box as its definition, which I’d do, too, if I were picking up five stars there.

The $599 million portfolio has 125 different stocks. The largest position is Central European Distribution Corp. (Nasdaq:CEDC) at 1.61% of assets. It’s a U.S. company that distributes many different U.S. and European liquor brands in Poland and other Eastern European countries. The second-largest holding, at 1.26% of assets, is FTI Consulting (NYSE:FCN), which specializes in consulting on forensics and litigation. In third place is Net 1 UEPS Technologies (Nasdaq:UEPS) at 1.11% of assets. It provides alternative banking services in South Africa, especially to people who do not have enough money for a traditional bank account. Up to 25% of fund assets may be held in companies based outside of the United States, and up to 10% may be invested in real estate investment trusts.

Matthew Hart has managed the fund since 2000. A second manager, Justin Speer, was hired in May of 2008 from Credit Suisse. The two are fond of oil and gas exploration and production companies right now, allocating 5.87% of assets that way. They have 4.81% of assets in life sciences tools and services companies, and another 4.69% in oil and gas equipment and services companies. The allocation reflects industries that are likely to hold up in a difficult consumer economy; even if Americans cut back on their energy consumption (and there is some evidence that they are), the Chinese and Indians are picking up the slack and then some.

The Van Kampen Small Cap Growth Fund’s A shares are sold through brokers and financial planners, so they carry a hefty 5.75% front load. The first breakpoint is at $50,000. The A shares also have a 0.25% 12b-1 fee. The management fee is 0.80% and other expenses are 0.33%, for a total expense ratio of 1.38%. This is lower than the category average of 1.59% and may explain some of the fund’s good performance. The shares are also available in a B class with no front load, a 5% max CDSC declining to zero over five years, and a 1% 12b-1 fee.

Over the last five years, the fund has posted an average annual return of 14.7%, significantly above the 8.74% of the average small-cap fund and the 7.37% of the S&P 500. Even this year, though, with the fund down 11.56% for the year-to-date, it is still outperforming its typical competitor, which is losing 12.26%, and the S&P, down 12.69%. The fund can be volatile; it was down 38.92% in 2001 and up 39% in 2003. Investors have to be able to live with risk, but they should be rewarded for that when the market turns.

Because small-cap companies may have a performance advantage over and above their investment risk, they should be a core part of most diversified portfolios. Investors who are working with brokers or planners should consider the Van Kampen Small Cap Growth Fund. Some day, this market will improve — it has to! — so this may be a great time to acquire shares.