03/2020 KIPLINGER’S PERSONAL FINANCE 35massively improves the business
that adopts it, becoming essential
and embedded in its operations.
The fund doesn’t have a long track
record, but since its November 2013
debut, Small Cap Growth returned
an annualized 11.5%, 1.7 percentage
points ahead of the S&P SmallCap
600 and better than 93% of small-
cap mutual funds.LOOK TO THE CLOUD
Investors with a high tolerance for
risk who want to capitalize on one
of the fastest-growing trends in tech
might consider the stock of firms
offering their products and services
via the internet—in other words, in the
proverbial cloud. Technology research
firm Gartner expects annual cloud
revenues worldwide to reach $355 bil-
lion in 2022, up from $228 billion in- Among the most promising next-
generation cloud companies are so-
called software-as-a-service firms.
These companies have revamped
the old model of providing services
through software with a renewable
licensing fee. Rather, customers pay
a subscription fee to access software
in the cloud. Such a model is attractive
because it creates a steady, predictable
revenue stream with fewer f luctua-
tions in customer demand, allowing
execs to invest efficiently in expanding
the business. Because customers typi-
cally sign long-term agreements and
fully integrate the software into their
businesses, they tend to stick around.
Though companies such as Sales
force.com and Workday have become
well-known names, the shift to doing
business in the cloud is still nascent.
The three small, fast-growing com-
panies below are well positioned to
grow along with the cloud. Because
these f ledglings lack a consistent
record of profitability so far, they’re
best suited for long-term investors
comfortable with more-speculative
holdings. But all have records of prodi-
gious revenue growth and have the
potential to deliver market-beating
returns over the next few years.
compared with a 17% average holding
among funds that invest in small-com-
pany stocks. A focus on fast-growing,
innovative firms accounts for the bias
toward tech, says comanager Gary
Wu. He and comanager Matthew Dent
favor firms with a dominant position
in a niche market, ample or growing
amounts of cash, and a management
team that allocates capital wisely and
with shareholder interests in mind.
The managers also value “sticky” busi-
nesses, ones that tend to retain cus-
tomers. As a result, the fund holds a
number of makers of what Wu calls
“mission critical” software—tech thatTech names currently predominate,
followed by health care firms; 17% of
assets are in foreign firms. Top small-
cap tech holdings include communica-
tions software firm RingCentral (see
below) and semiconductor manufac-
turer Macom Technology Solutions.
The fund has bested its average peer
in seven of the past 10 calendar years,
with a 16.6% annualized return that
beats the average tech fund by 1.4
percentage points. Over that period,
USAA Science & Tech was 11% less
volatile than rival funds, on average.
DF DENT SMALL CAP GROWTH (DFDSX)
allocates 40% of assets to tech stocks,