Wasatch Funds founder Sam Stewart was content to spend his life in academia until he heard a lecture on “efficient markets theory” that prompted him to prove it wrong. To discover stocks whose growth potential the market has yet to recognize, Stewart ended up applying the university world’s rigorous research approach to security selection.
The result? Wasatch analysts don’t just run stock screens and listen to earnings calls; they interview a company’s suppliers, competitors, customers and management teams. Whenever possible, they’ll also attempt to use a company’s products and services for themselves.
And as in the academic world, each analyst’s work is subject to peer review, a highly collaborative process that not only disseminates the best ideas throughout the firm, but also tests the strength of each investment thesis. It’s no surprise then that Wasatch World Innovators (WAGTX), which gathers the firm’s best ideas in one fund, has returned an impressive 11.2 percent annualized over the past 10 years.
The fund was originally launched in 2000 under a different name and focused on the global science and technology sectors. In 2008, Stewart took over as manager and later broadened the mandate to include innovative companies in all sectors. Even so, the fund’s portfolio is still dominated by technology and health care names, which comprise 43 percent and 20 percent of its equity holdings, respectively.
The fund can invest as much as 80 percent of its assets overseas. But given the global economic uncertainty, the fund has reined in its foreign exposure. Recently, US companies comprised almost 64 percent of stock holdings, while just under 12 percent of assets were invested in emerging markets.
Management’s surfeit of caution is also evidenced by the fact that 12 percent of the fund’s portfolio is currently idling in cash. However, that’s down 4.5 percentage points since the end of March, suggesting that management took advantage of the market’s recent swoon.
Beyond its research bent, Wasatch is primarily known as a specialist in small-cap growth stocks. Indeed, small- and mid-cap stocks comprise almost 57 percent of the fund’s portfolio. Stewart believes that smaller companies tend to grow faster than larger companies, and that Wasatch’s informational edge can help it exploit the market inefficiencies in the small-cap arena.
Because of the shift in the fund’s mandate, it’s difficult to decide which benchmark provides an appropriate comparison for long-term performance. Nevertheless, the fund’s 11.2 percent annualized return over the trailing 10-year period has trounced both the S&P 500 and the MSCI EAFE by 4.8 percentage points annually. What’s more, over the past three years, the fund has been significantly less volatile than the market, though over the long term its concentrated portfolio tends to exhibit the higher volatility characteristic of foreign stocks.
The fund’s one major drawback: a relatively high expense ratio. However, Wasatch is a shareholder-friendly firm, and that expense ratio could fall further once the fund’s outstanding performance starts to attract more assets.
Wasatch World Innovators offers access to high-quality growth stocks of all sizes, both here and abroad, so it’s well suited to investors seeking a comprehensive growth fund.
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