Fund Observer

With investors still cautious about the third-quarter rally, small caps have seen mixed results over the past few days. While smaller companies often charge to the head of the pack at the beginning of a recovery, they stalled earlier this week as investors pondered the health of the larger names that drive the market. Still, the Russell 2000, which tracks small caps, is up by 22.4 percent year to date.

[See 5 Myths About the Economic Recovery and Why Small Caps Are Sizzling.]

To get a sense of what small companies are looking attractive, U.S. News spoke with Sam Dedio, manager of the Artio U.S. Small Cap fund, which has gained 66.5 percent year to date. As small caps bottomed out during the credit crisis, Dedio picked up some debt-ridden companies that later surged when investor confidence began to rebound. Those gains have complemented his traditional strategy, which focuses on solid cash flows and market-changing innovation.

Here are some companies that Dedio says have strong fundamentals and room to run:

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With news Monday that Brazil will impose a tax on foreign purchases of its debt and equity, stocks in the surging Latin American giant have taken a sharp hit. This decline has tempered enthusiasm about the red-hot MSCI Emerging Markets Index, which was up 73 percent year-to-date before Tuesday's outflows from Brazil.

To get a sense of what the new 2 percent tax, which went into effect Tuesday, means for investors with positions in Brazil, U.S. N ews spoke with Josephine Jiménez, manager of the emerging markets fund Victoria 1522. In recent months, her fund has shifted a large chunk of its portfolio into Brazil while dialing back its positions in China because of concern about the country's efforts to slow loan growth. Currently, about 34 percent of the fund's assets are invested in Brazil.

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As Congress looks to reshape the country's battered financial sector, hedge funds have emerged as a key puzzle piece. And nearly a year after disgraced financier Bernard Madoff's Ponzi scheme ran out of gas, legislators are considering draft proposals that would tighten the leash around the secretive industry.

[See Judge Upholds Advertising Rules in Hedge Fund Case.]

The drafts, released by Democratic Rep. Paul Kanjorski of Pennsylvania, would require private pools of capital with more than $30 million in assets to register with the Securities and Exchange Commission, with an exception for venture capital funds. Practically, this would mean that affected funds would have to disclose information about their fees, risks, trading practices, and other elements of their business.

In an apparent attempt to "hedge" their bets and avoid further intervention, fund lobbyists have supported registration. This marks a rare concession from an industry known for jealously guarding its private status.

Meanwhile, Kanjorksi's drafts would also allow the SEC to ban mandatory-arbitration clauses in brokerage contracts. Separately, legislators have long been considering a similar bill, the Arbitration Fairness Act, which proposes that Congress make the clauses unenforceable. By leaving the decision up to the SEC, Kanjorski is hoping to strike a middle ground.

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What do your mutual funds and a pack of cigarettes have in common? According to a recent study, it's more than just toxic assets. Both, it turns out, come labeled with important information that most buyers choose to ignore.

Like the tobacco industry, mutual funds have a number of regulations governing their ads. But just as many smokers pass over the warnings on their favorite cigarettes, investors tend to overlook readily displayed information about costs. In particular, researchers say investors pay little attention to the expense ratios that mutual funds are required to display on certain advertisements. Given that even tiny differences in ratios can either save or cost investors thousands of dollars, the study offers important insight into consumer behavior.

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