Small-cap stocks often fly under the radar when markets are volatile, but this year’s Third Avenue Small-Cap Value Fund could change the way investors think about them. The fund is down 4.5% year-to-date, convincingly outperforming the large-cap S&P 500 index, which has lost 12.9% over the same period, according to FactSet data. The fund’s performance does not suggest that small-cap stocks outperform their larger counterparts. But Victor Cunningham, portfolio manager at Third Avenue Small-Cap Value Fund, thinks the divide between small- and large-cap stocks may be narrower than expected. Cunningham told CNBC’s “Squawk Box Asia” on Wednesday that “Over the longer term, large caps and small caps have been in a pretty tight range against each other.” He said large-cap companies have “benefited more” from low interest rates, but rising interest rates and a de-globalized world could tip the balance in favor of small-cap companies. As it stands, the small-cap benchmark Russell 2000 is down 15.1% this year, closely tracking the decline of the S&P 500 over the same period. Pay Attention to Fundamentals While he believes the Russell 2000 is near its bottom, Cunningham said he thinks some small caps will perform worse than others. In particular, he said he thinks the reduction in monetary stimulus will affect specific sectors. “I think some of those companies will probably have a much harder time funding and growing over time,” he said. Against that backdrop, Cunningham said he believes it’s important to choose carefully. His advice: Pay attention to the fundamentals. Read more The asset manager predicts the next bull market – and reveals how to position it Here’s how to invest for the yield to beat a bad year for stocks and bonds – according to Wall Street experts say these small caps are good buys in a recession – BofA up 40% When it comes to evaluating companies, Cunningham prefers companies with financial strength and acumen in manage. He likes stocks that are trading lower and have a “favorable outlook” for increasing their net worth. In particular, he favors well-capitalized companies that have a “history of playing offensively while others play defensively.” According to Cunningham, such companies can weather unexpected events like the Covid-19 pandemic without being “forced to make decisions” that could be detrimental in the long run. He added: “We also want to align ourselves with managers willing to buy companies and make acquisitions in a more challenging environment. “And that’s really important to us. We want to see the aggression that other management teams have to fear.” What’s in the Fund This fund counts Washington Trust Bancorp among its top 10 holdings. According to Cunningham, the bank has an “excellent” credit history, including during the 2008 global financial crisis. He said the bank also has a strong capital position and is expanding its net profit margin – a the main profitability measure that banks use. Electrical infrastructure company MYR Group is another. Cunningham said he prefers the Colorado-based company for its financial strength and methodical growth. He said he sees the company benefit from higher infrastructure spending, the rise of renewables and modernization of the grid. MYR has a “record” order book of $2.4 billion, he said. The fund also owns a stake in Texas-based Tidewater, the world’s largest provider of offshore supply vehicles. Cunningham said the company has spent money on increasing the size and quality of its fleet over the years and now boasts one of the newest fleets in the world. The company is poised to take advantage of higher spending in the oil industry, still 45 percent below its previous peak in 2014, despite the current recovery, Cunningham said.