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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Although the S&P 500 made a virtually complete recovery within two years of its precipitous drop in 2008-09, some stock market styles show plenty of upside potential remaining while others do not, according to head of research for strategic investment research provicer, David Ranson of Wainwright Economics.
In a recent Equity Market Outlook research report to clients, Wainwright Economics describes the near term valuation bets in U.S. stock market styles, and recommends its choice for the coming 12-months.
Using an exponential trajectory, the analysis identifies the S&P at July end as nearly fully priced, and the Russell 1000 index similarly close to full value at 2.9% below its benchmark curve, but the Russell 2000 as cheap, 15.8% below its potential.
Wainwright’s report goes on to explore different ways in which large cap and small to mid cap value and growth stocks regained since early 2009 in resilience versus endurance terms, and their potential appreciation.
Both Russell assets face substantial though unpredictable downside risk, however, looking at their very different upside potential, the choice is clear: as the remaining damage to investor confidence is repaired, near term valuation favors smaller cap stocks.
On value versus growth, the value of the Russell 1000 is normally more resilient than the growth segment, but this time around the better bet goes to growth. The growth segment has more endurance and has produced higher returns since the market bottom. The upside potential for Russell 1000 growth stocks is 3.9% vs. 2.3% for value.
Lead author of the report, David Ranson, concludes that In the Russell 2000 the upside potential for growth stocks offers a large difference: 18.3% for growth over 12% on value.
Luis de Agustin