Hidden Gem of the Small-Cap World

For purists, the $113 million Sit Small-Cap Growth Fund may not strictly fit the bill. The fund holds such names as Celgene Corporation [NYSE: CELG], a biopharmaceutical company in New Jersey with a market capitalization of $27 billion. New York–based leather goods and accessories company Coach, Inc. [NYSE: COH], is also not so small at a market capitalization of almost $18 billion. And Reston, Virginia–based NII Holdings, Inc. [Nasdaq: NIHD], a mobile telecommunications firm, comes in at more than $14 billion.

Those are hardly the sorts of market capitalizations that fit the normal definition of “small cap,” which is generally understood to cover any company with a market capitalization (the number of outstanding shares multiplied by the per-share price of the stock) of less than $3 billion.

Those willing to set definitions aside and look at the fund’s performance, however, will discover a hidden gem. Gene Sit and fellow small-cap fund managers Kent Johnson and Mike Stellmacher manage the no-load Sit Small-Cap Growth Fund. Sit has more than 45 years of experience and has been a mainstay of the Twin Cities mutual fund scene since 1981, when he founded Sit Investment Associates, Inc., in Minneapolis. His company’s mutual funds have been putting up excellent long- and short-term performance numbers since their inception in 1982. That’s in part because Sit is willing to let his winners run.

Hence the positions in large-cap companies—they were a whole lot smaller when he bought them.

{Q} Does the fact that your fund holds some very large companies cause any problems for potential investors?

{Sit} For some of the purist [investors] it does. Many institutions must live by strict guidelines and definitions of what’s a small-cap stock and what’s not. But actually, if you take out the top five largest market-cap stocks from the fund, which represents less than 5 percent of the $113 million portfolio, the weighted market cap of the portfolio drops to $2.9 billion from $3.97 billion.

{Johnson} Plus, the fund behaves like a small-cap fund, with a high correlation to the Russell 2000 Growth Index, which is our benchmark. [The Russell 2000 Growth Index includes small-cap U.S. growth stocks with an average market capitalization of $1.5 billion.]