A challenge to active managers is size. As assets under management (AUM) increase, it can become more difficult to continue outperforming. This is because a fund manager will have greater difficulty following a strategy if the amount of money available to invest is greater than the opportunities available to invest in. Some strategies work better when the level of AUM is smaller.

Finding mutual funds still potentially small enough to continue outperforming isn’t always easy because they lack the publicity and marketing budgets of their larger brethren.

To identify such potential gems, the universe of actively managed mutual funds was narrowed down to those with $500 million or less in AUM. These funds rank in the approximate bottom half in terms of size out of all no-load mutual funds.

Funds were then required to have three-year returns in excess of their category peers. This identifies mutual funds with more recent outperformance without overly emphasizing very short-term performance. Leveraged and inverse funds were excluded because their returns may be attributable to the higher level of risk taken as opposed to the strategy itself.

Funds were required to be open to new investors. A minimum initial purchase amount cap of $10,000 was also required to ensure the passing funds would be of interest to a broad range of AAII members. All passing funds are no load, though some charge redemption fees. These fees are generally used to discourage short-term trading of fund shares. The table presents a list of the 20 overlooked actively managed funds with the highest three-year annualized returns.

Most of the passing funds have an R-squared of 90% or less. This suggests that less of the fund’s returns can be explained by movements in the S&P 500 index. Lower R-squared values imply a more active approach on the part of the fund manager.

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