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Sit Small Cap Dividend Growth Fund
Sit Mutual Funds launched its Small Cap Dividend Growth Fund on March 31, 2015. Since then, the stock market has had periods of strong growth, but also experienced challenging times with significant volatility. As of June 30, 2020 the Fund’s performance has garnered the highest rating of five-stars, out of 608 funds in the U.S. Equity Small Blend category, from Morningstar, Inc.®, an independent evaluator of mutual funds.
Sit Small Cap Dividend Growth Fund was the third dividend-growth fund to be added to the Fund Family lineup and is a combination of the Firm’s dividend growth expertise and extensive experience in small cap investing. The first dividend growth product was the Sit Dividend Growth Fund, which was formed in 2003 and then, building on that success, the Sit Global Dividend Growth Fund was added five years later in 2008. These products offer, not only long-term growth potential but also volatility protection derived from the dividend income generated by the investments.
Small company stocks should be part of long-term investors’ portfolios because they offer greater potential for increasing shareholder value over time than larger firms. Within the small cap stock universe, companies will have a lower level of sales, but it is easier for a firm with $5 million in sales to double in size than it is for a firm with $10 billion in sales. Aiding the execution of their business plans is the ability of smaller companies to be more nimble than larger ones and move quickly adjust to changes in market conditions.
Another attractive aspect of the small cap stock universe is the potential for less efficient pricing to allow opportunities for higher profit margins. While larger corporations may have numerous analysts following them, smaller firms may have few, if any, analysts offering coverage. Likewise, actions/events at larger corporations such as Apple or McDonald’s typically make leading news stories, but similar happenings at small companies may not make the news at all. With less coverage, fewer investors tend to trade a stock and a company’s share price may lag its actual value until it garners enough attention and trade volume to encourage its valuation higher.
However, small companies with higher growth potential may also have a higher risk level. For example, owning a small stock with lower liquidity could be more difficult to sell, and smaller companies can be more vulnerable in economic downturns as financing options may be fewer.
The Sit Small Cap Dividend Growth Fund seeks to balance risk by focusing on small companies that not only have growth potential, but also pay dividends. History shows that stocks which pay dividends tend to withstand down markets better than stocks that do not pay dividends. Sit’s stock selection process also focuses on risk reduction by researching quality companies for the portfolio. Preferred characteristics include growing cash flows, unique products and services, growing product demand, and strong financial position along with experienced, capable management. These companies typically average approximately $3 billion to $4 billion in capitalization size at time of purchase in the Fund.
These strategies have produced favorable results for the Fund over the five-year period ending June 30, 2020. It has been less volatile than its benchmark, the Russell 2000® Index, as measured by standard deviation (17.2% vs. 20.3%, respectively), while producing similar annualized returns (4.18% vs. 4.29%). This performance also placed the Fund in the top 10% of all funds within the Morningstar, Inc.® small blend category for the same time period.
Small cap stocks in general have not kept pace with their large cap counterparts over the past several years, and dividend payers have lagged this year as investors question the sustainability of continued dividends due to the economic impact from COVID-19. However, small cap stocks have historically outperformed large cap stocks over the longer term, and relative valuations for many dividend-paying stocks have reached very attractive levels in historical context. Investors taking a long-term view could be well rewarded if small cap dividend-payers regain their footing as the economy recovers.