According to data from Morningstar, one of the top small-value mutual funds this year, beating the broader market and its other funds is a small fund based in Cincinnati with a slightly investing strategy. odd, according to data from Morningstar. Auer Growth Fund is a small value fund with assets under management of $34.6 million. To date, that’s up 13.39% from the S&P 500’s roughly 10% drop. That’s a top 1% performer against other small-value funds. Its long-term performance has been stronger. Over the past five years, the fund has outperformed the portfolio index – the Russell 2000 Value Index – 4.8 percentage points and surpassed the average return in the portfolio by three percentage points, according to Morningstar. Over a 10-year period, however, the fund has underperformed the index by 1.2 percentage points. Since its inception in December 2007 through the end of June, the fund has returned 1.27% compared with a return of nearly 9% for the S&P 500, according to fund advisor SB Auer Funds LLC. In fact, its ranking this year is a well-deserved bonus for Auer Growth and its strategy – in 2018 the fund ranked in the 100th percentile (last place) in the mixed portfolio. Morningstar’s small. While it grew to the 16th percentile in 2019, it dropped to the 93rd percentile in 2020. About five years ago, however, Auer Growth modernized its stock-picking strategy and the way it they consider those names in the portfolio, which has helped its performance, according to Eric McKenzie, the fund’s portfolio manager. Picking and Holding Stocks The fund’s current investment strategy is relatively simple. “We look for high-performing stocks with deep discounts,” said McKenzie. The management team has three main criteria when choosing an investment, he said. Companies must have at least 20% annual quarterly revenue growth and at least 25% quarterly annual earnings growth. In addition, stocks must be trading with a price-to-earnings ratio of less than 12 to be included in a portfolio. Outside of these parameters, the fund is not limited to or targeted at any particular sector or company size. Instead, it is looking for stable performance. “We really are a fund that can really go anywhere,” says McKenzie. The fund’s largest weighting stocks include energy, healthcare, technology, industrial, and consumer names. The fund rebalances quarterly and follows the fund’s criteria to determine what’s left in the portfolio. If a stock in the portfolio no longer meets its investment criteria, it is discarded and replaced with a suitable stock. During the quarter ended June 30, the fund selected three new names. It also bought additional shares of existing investments, such as homebuilders MDC Holdings and PulteGroup. Going forward, the advisers think the fund is well-positioned to operate and are confident it will be able to find companies with growing sales even as the US slips into a recession. “We are really pleased with what the portfolio has done and really humbled about the whole process,” says McKenzie. According to Morningstar’s analysis, the actively managed fund has a gross expense ratio of 2.37%, which is higher than other funds.