T. Rowe Price Diversified Small Cap Growth Fund

Fund Overview

The T. Rowe Price Diversified Small Cap Growth Fund has undergone a change for the better.

As of April 04, 2012, the fund has assets totaling almost $214.27 million invested in 321 different holdings. Its portfolio consists primarily of shares of smaller U.S. companies. 

Recently, this small-cap growth fund has undergone a dramatic turnaround. That's mostly thanks to what manager Sudhir Nanda has done since he took over in 2006. With Nanda at the helm, the fund has implemented a quantitative approach that screens for a number of factors, including cash flow and return on equity. Since Nanda refuses to make sector bets, the fund's recent outperformance has stemmed almost entirely from stock selection. Nanda keeps his sector weightings in line with his benchmark, the MSCI U.S. Small Cap Growth Index. "We do lose out on some opportunities, but we don't make mistakes by being in the wrong sector at the wrong time," he says. After finishing 2010 in the top 16 percent of Morningstar's small growth category, the fund is continuing to outperform in 2011. The fund has returned 3.92 percent over the past year and 32.26 percent over the past three years.

Before Nanda's arrival, the fund saw several years of mediocre performance. In each year between 2000 and 2004, for instance, the fund finished in the bottom half of Morningstar's small-cap growth category. The fund's trailing 10-year returns still carry much of that baggage. Under Nanda's watch, the fund has kept a lid on turnover, in part since trading costs can be high in the small-cap space. The fund has returned 7.70 percent over the past five years and 6.76 percent over the past decade.

Investment Strategy

The fund uses quantitative screens to evaluate companies listed in the MSCI U.S. Small Cap Growth Index. Nanda has different screens for different sectors, but common themes include cash flow, valuations, stewardship, and price momentum. Management then performs qualitative evaluations of high-scoring companies and makes final selections for the portfolio. Management will often take a pass on high-scoring companies if those companies recently had senior management changes or if their returns appear to be driven by anomalies. Nanda likes to keep turnover low. 

Role in Portfolio

Morningstar calls this fund a "supporting player."

Fund Opinion

This fund received the Bronze award for the Small Cap Domestic Equity category in Standard & Poor’s 2010 Mutual Fund Excellence Awards.

Standard & Poor's

Management

Sudhir Nanda has managed the fund since 2006.

In the annual Lipper/Barron's Fund Families Survey of 2009, T. Rowe Price ranks 2 out of 61 fund families surveyed. 

Morningstar gives this fund a stewardship rating of B on a scale of A to F, saying: "This fund benefits from a top-rate investment culture and reasonable fees. However, it would score better if management made a bigger investment and if its board was more independent."

Morningstar 2011-02-01

Performance

The fund has returned 3.92 percent over the past year, 32.26 percent over the past three years, 7.70 percent over the past five years, and 6.76 percent over the past decade.

Hypothetical Growth of $10,000

Updated 03.31.2012

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Holdings

The fund invests primarily in U.S. companies. It has upward of 300 holdings.

Asset Allocation

	% Long	% Net
Cash	0.3	0.3
Stocks	94.49	94.49
Bonds	0.0	0.0
Other	2.69	2.69
Foreign Bonds	0.0	0.0
Foreign Stocks	2.52	2.52
Convertible	0.0	0.0
Preferred	0.0	0.0

Updated 12.31.2011

Top Holdings

Performance as of 03.31.2012

Portfolio as of 12.31.2011

	Ticker	YTD Return %	% Net Assets
Clean Harbors, Inc.	CLH	5.6	1.23
Pharmasset, Inc.	VRUS	6.84	1.22
Panera Bread Company, Inc. A	PNRA	13.16	1.15
Gardner Denver, Inc.	GDI	-17.82	1.04
TransDigm Group Inc	TDG	22.28	0.93

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Fees

T. Rowe Price Diversified Small Cap Growth Fund has an expense ratio of 1.10 percent.

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Risk

Like all stock funds, this one comes with some risks. Additionally, small-cap stocks can be more volatile than the broader market.

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