This mutual fund is the best in the country this year, up 65%. Here's what they are buying now

Published Sat, Nov 27 20218:58 AM EST

One small-cap value fund is beating all other U.S. equity mutual funds this year, and one of its managers said the party is not over. The Bridgeway Small-Cap Value fund — which trades under ticker BRSVX — is up more than 65% in 2021. This compares to the Russell 2000 Value, which is up roughly 27% this year, and the small-cap benchmark Russell 2000, which is up 14% year-to-date. This year's stellar performance makes Bridgeway the best performing U.S. equity fund this year, excluding leveraged funds and ones specializing in one sector, according to a screen of Morningstar's universe. "It's not 'you just got lucky with a couple stocks,' it's really what we continue to have conviction about...that is small size and deep value," said Elena Khoziaeva, one of the fund's portfolio managers. Bridgeway Small-Cap Value — with about $486 million in total assets — invests in a diversified portfolio of small value stocks, or those that Bridgeway believes are cheap. The firm screens through the Russell 2000 Value and finds equities that are highly ranked in one of three categories: value, company financial health and price momentum. The firm uses measures like price to earnings, price to sales, or price to cash flow to determine which stocks are a discount to peers. Khoziaeva, who is also the head of U.S. equity at Bridgeway, said the firm does not super-score the three areas and stocks are usually ranked very high in one area, and not in the others. "If you're looking for deep value names, don't dilute that requirement with momentum, or you're going to find mediocre names somewhere in the middle. Find the best names in deep value, in relative value and then separately find the best names in momentum," she added. Then, Bridgeway decides what should be each stocks' allocation to the fund, however no one stock is even 2% of the fund. "The majority of stocks are invested in the value category, that's what responsible for deep-value positioning, this is what's responsible right now for out stronger performance, as value has been coming back," said Khoziaeva. Khoziaeva attributes the fund's stellar performance this year to value and small stocks coming back into favor. As interest rates rose throughout the year, investors rotated out of growth pockets of the market and into more cyclical names. The fund uses the other two categories, company financial health and price momentum, as a diversifier. These areas work as downside capture when value is less in favor. For example, last March during the coronavirus market rout that spurred the fastest bear market in history, Bridgeway Small-Cap Value outperformed the Russell 2000 Value by 14 basis points because of its momentum stocks (1 basis point equals 0.01%) "It's not frequent that all three outperform or that all three underperform. It's all about consistency over a long period of time," said Khoziaeva. Top holdings The portfolio holds 173 different equities, and microcaps make up more than 56% of the fund's constituents. Energy, industrials and some financial services are some of the major sectors the fund touches, all of which have performed well in 2021. Bridgeway Small-Cap Value's top 10 holdings make up 16% of the fund. Take a look at the fund's top holdings as of September 30, 2021. The fund's two largest holdings are crude oil tanker company DHT Holdings and hydrocarbon exploration company SM Energy. Other top holdings include Boston-based bank Berkshire Hills Bancorp ., packaging and paper company Veritiv , natural gas company CONSOL Energy and investment bank Cowen . Bridgeway made some interesting moves in the third quarter, like new purchases of hotel-focused real estate investment trust Ashford Hospitality Trust and home construction company Hovnanian Enterprises . The fund also picked up shares of truck stop company TravelCenters of America . TravelCenters of America is up more than 15% this quarter alone. Khoziaeva said TravelCenters of America ranks high in the company financial health category. More room to run? After an impressive year for Bridgeway, investors might be wary of buying the fund; however, the firm said there is still a ways to go for value to get back to historical norms. "So, no, the party is not over. There's still room to grow for those small value stocks," said Khoziaeva. The fund is remaining agile by moving in and out of its best and worst performing stocks. "We implement what's probably the best concept of investing: buy low, sell high," she said. "We are trimming what's done well and then investing in what's done less well. That contrarian flavor further makes the strategy value-leaning." Take a look at Bridgeway's most recent purchases in the third quarter of 2021. R.R. Donnelley & Sons , OraSure Technologies , Ranger Oil , Innoviva . State Auto Financial and Community Healthcare Trust are also new purchases for Bridgeway Small-Cap Value. Other third quarter purchases include City Holding , AMERISAFE , Stock Yards Bancorp. , B. Riley Financial , Ocwen Financial , Carrols Restaurant Group and Sprouts Farmers Market. Bridgeway Small-Cap Value has been actively managed by John Montgomery, the founder and CIO of Bridgeway, since its inception in 2003. Khoziaeva and Michael Whipple have helped manage the fund since 2005. The fund has a minimum investment of $2,000 and an expense ratio of 0.92%. The portfolio is rated 5-stars and Bronze by Morningstar.

In this photo illustration, the TravelCenters of America Full-service restaurants company logo seen displayed on a smartphone.

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One small-cap value fund is beating all other U.S. equity mutual funds this year, and one of its managers said the party is not over.