Once high fliers, these funds are having to seek new investors to compensate for an exodus of shareholders. By Stacy Rapacon, Online Editor April 24, 2008 The first few years of this century were marked by a calamitous bear market. But it was nothing of the sort for bargain-priced small-company stocks and the funds that specialize in them. Most small-company value funds made money -- some of them made good money -- even as the blue-chip-oriented Standard & Poor's 500-stock index surrendered 47% between March 2000 and October 2002. Investors poured money into small-company value funds, and many of the best performers responded by shutting their doors to new customers. Now, the game has changed. An index of undervalued small-capitalization stocks sank 28% between last June and March (the index is now 20% below its peak). As a result, investors have been pulling money out of small-company value funds and fleeing to large-company stocks for safety in a slowing economy. But sluggish performance has its benefits: More and more small-company value funds are reopening to new clients. Advertisement They're doing this not just because shareholders are bailing out, leaving fewer assets to manager, but also because turbulent markets over the past year are creating more opportunities for value-conscious managers. Meantime, small-company value funds aren't doing to badly this year compared with the rest of the market. On average, they're down 5% year-to-date through April 23. Small-company growth funds have tumbled 12% so far this year. Large-company value funds and the overall market gave dropped about 6%. Here's a look at three small-company value funds that have reopened recently: Royce Opportunity (symbol RYPNX) has half of its holdings in volatile microcap stocks -- the smallest of the small. It neatly exemplifies the way investors chase performance. Advertisement The fund returned 73% in 2003, its best single year ever. The money came rolling in and the fund closed to new investors. "People think you're going to have another 70% year," says co-manager Bill Hench. Over the past 12 months through April 23, during which the fund lost 18%, investors have been withdrawing money at roughly the same pace they added money during and after 2003. But redemptions often force managers to sell stocks when they don't want to sell and leave them with little cash for scooping up bargains. The logical solution: reopen the fund, which Royce did on January 14. "With lots of good values out there, I would like to take advantage of the opportunities," says the other co-manager, Boniface "Buzz" Zaino, who has been on the fund since 1998. Hench says he and Zaino are finding some of those opportunities in the beaten-down financial sector. "With the big banks pulling back, smaller banks can write some good loans at good prices." Advertisement He and Zaino are also finding good values in consumer-related stocks. One of their top holdings, at last report, was Hanesbrands (HBI), a maker of undergarments and casual clothes. The fund's long-term record is solid. It has returned 13% annualized over the past ten years. The fund, which charges 1.11% in annual expenses, requires an initial minimum investment of $2,000. Wasatch Small Cap Value (WMCVX) swung its doors open in August 2007 for the first time since 2002, when it opened for just a bit more than a month. Managers Jim Larkins and John Mazanec build their portfolio stock by stock, generally focusing on companies with market values of less than $2.5 billion. In particular, they seek "fallen angels," battered stocks they believe will come back. At present, they're finding plenty of fallen angels, particularly in the retailing sector. Advertisement Year-to-date through April 23, the fund lost 7%. Over the past ten years, though, it's returned 13% annualized. It requires a minimum initial investment of $2,000 and levies 1.69% in annual expenses. Talk about a fall from grace. Schneider Small Cap Value (SCMVX) produced magnificent returns between 1999, its first full year, and 2006. Highlights were double-digit gains in 2000 and 2001, down years for the S&P 500, and a return of 106% in 2003. Over the past 12 months, though, the fund tumbled 26%, trailing the Morningstar small-value index by 11 percentage points and the S&P 500 by 21 points. One disastrous holding: American Home Mortgage, now in bankruptcy reorganization; its shares dropped from $10 to $0.30 per share in a matter of days. Manager Arnie Schneider III is a deep value investor. He looks for struggling companies selling at bargain-basement prices. At last report, his fund had 30% of its assets in financial-services stocks, a big reason for the poor recent performance. The fund charges 1.10% in annual expenses and a 1.75% in redemption fee for shares sold within a year of purchase. The minimum initial investment is $20,000.