Top small-cap funds focus on tech, healthcare

Healthcare, technology and Japanese small-cap stocks look poised to outperform the broader market in the year ahead, according to some of the best performing U.S.-based stock fund managers of 2017. Small-cap stocks should be among the largest winners of the newly-signed Republican-led tax law, which slashed corporate taxes at home and made it cheaper for companies to bring back their profits from overseas. Yet small-cap fund managers from Loomis Sayles, Federated Investors and Wasatch Advisors whose funds are up 30 percent or more for the year say that a bigger factor in the year ahead will be continued global growth.

"The tax bill is going to make some balance sheets look better on the margin, but we think the larger factor is that the recovery is still going on internationally," said Kenneth Korngiebel, a co-portfolio manager of the $335-million Wasatch Micro Cap fund, which is up 36.1 percent year-to-date. That performance makes it the 13th best small-cap fund of the year, according to Lipper data, which tracks about 1,800 small-cap funds. As a result, Korngiebel is shifting more of his portfolio into international stocks, which often trade at lower valuations than their U.S. counterparts and have better growth characteristics, he said. Korngiebel is adding to stocks like Japanese outsourcing company UT Group Co Ltd, whose shares are up 243 percent for the year to date, and which he expects to grow its revenue by more than 30 percent in the year ahead. He is also adding to his position in U.S.-based Tabula Rasa Healthcare Inc , which helps doctors screen for potential drug interactions. Shares of the company are up 97 percent in 2017.

"The percentage of the population who take five or more medication is going up and adverse drug events are expensive and can lead to loss of life. What we see here is opportunity to take advantage of an under-covered company that is unique and meets a large need," he said. Overall, companies in the small-cap benchmark Russell 2000 index pay a median effective tax rate of 31.9 percent, while the larger, multinational companies in the S&P 500 pay a median effective tax rate of 28 percent, according to Thomson Reuters data. The median for the 30 mega-cap stocks in the Dow Jones Industrial Average is 23.8 percent.