Brandes U.S. Small Cap Fund

Analysis: Managed by the Brandes Investment Committee using a bottom up, Graham and Dodd, value focused approach, this U.S. focused small / mid cap fund is looking to build a diversified portfolio of businesses that are trading below their estimate of true value. As of September 30, the fund held 56 names with the top ten making up just under 30% of the fund.

Given the fact that the portfolio is built on a stock by stock basis, sector weights are the by-product of stock selection which means that the portfolio will quite often look dramatically different from its benchmark index, the Russell 2000. That does not mean that there aren’t risk controls in place, quite the contrary. For example, the maximum weight of any one security in the portfolio will be capped at 5%, and sector weights cannot exceed the great of 20% of the fund or 150% of the index.

Portfolio turnover has been modest, averaging around 50% for the past five years. It was highest in 2009, which is not surprising given that many companies were trading at very attractive valuations at that point in time, allowing the managers opportunity to jump in and take advantage.

While recent performance has been very strong the long term numbers are largely disappointing. As of October 31, the fund had an annualized loss of 0.45% while the index gained 3.79% during the same period. For the past year, it is up 27% while the Russell 2000 gained 13.4%. Volatility has been considerably higher than both the category and the index. The fund was hit particularly hard in 2007 and 2008.

The MER of the fund is 2.64% which is in the upper half of the category.

Despite the marked improvement in short term performance, we would be reluctant to recommend this fund at the moment. There are a number of other small / mid cap offerings that we believe offer a more compelling risk reward profile than this one, including the Trimark U.S. Small Companies Fund and the Fidelity Small Cap America Fund.