A Fund That's Actually Up
If funds were men and you were a single woman, Wasatch Strategic Income might be the guy your grandmother nags you to date. "Such a nice family," she'd say of the Wasatch funds, reputed for their fine long-term records picking small-company stocks.
Strategic Income doesn't have a long-term record -- it's barely two years old. But the fund (symbol WASIX) is having a bang-up 2008.
Year to date through February 13, it was up 0.64%. That might not seem like a big return, but it's enough to put Strategic Income in the number-one spot for its category. It tops the average mid-cap value fund by almost 5 percentage points and the Standard & Poor's 500-stock index by 7 points. In 2007, its first full year, the fund lost 2%, trailing its peer group by 3 percentage points.
As its name suggests, the fund invests in dividend-paying stocks, as well as bonds. Lead fund manager Sam Stewart Jr. follows the classic Wasatch strategy. He builds his portfolio stock by stock, screening for firms pay attractive and sustainable dividends or that are likely to pay higher dividends in the future.
Beyond that, he prefers companies with experienced managers, competitive advantages and the ability to capitalize on demographic trends. He generally keeps at least 25% of the $21- million fund's assets in financial stocks, including real estate investment trusts.
Once Stewart and his team determine that a company looks good on paper, they pay a visit to "kick the tires," he says. While talking with management, they’ll often learn of some other companies to consider for the portfolio.
Recently, Stewart has been straying a bit from the typical Wasatch holdings. He's starting to move the fund away from away from so-called microcaps -- the smallest of the small -- because they don't usually pay dividends. For Strategic Income, he prefers larger, more established, larger companies -- those with market values of about $5 billion. With companies of that size, "you can be more confident of where they’re going to be over the next five years," Stewart says.
But his best ideas still come from the family. Most Wasatch funds focus on smaller companies, so Stewart picks up stocks whose market values have appreciated beyond the other funds' comfort zones but still have "some growth runway left."
One example is CapitalSource (CSE). With a market value of $3.4 billion, it's a bit big by Wasatch standards but just right for Strategic Income. He describes CapitalSource as a "mini-bank" that lends to small businesses, with an average loan size of $4 million.
Stewart noticed CapitalSource when he was at a conference to see representatives of other companies. He had some spare time, so he wandered into CapitalSource's presentation and was impressed with its focus on in-depth underwriting. "The company's managers are really on top of these businesses to make sure they can get the loan paid back," he says.
Stewart attributes Strategic Income's positive start for the year to its heavy weighting in financials. Notwithstanding the group's well-publicized problems with subprime mortgages, the financial sector is fairly stable and grows faster than the overall economy, says Stewart.
"People were so aggressively negative on these companies," he says, "but just because you're making loans, it doesn't mean you made a bunch of bad, inappropriate loans."
He avoids cyclical companies (those that are tied closely to the ups and downs of the economy), as do all Wasatch funds. Stewart also is steering clear of tech and foreign stocks, which are favored by the fund's siblings but, he says, are "overdone and overpriced."
Stewart managed Core Growth -- Wasatch's flagship fund -- with much the same strategy when it soared in 2000. In the two years before, the fund (WGROX) lagged a market that was prospering from Internet investments. He avoided ‘Net stocks and concentrated instead on small- and midsize financial-services companies. When the tech bubble burst, Core Growth started to clobber the competition. The fund returned 37% in 2000, a down year for the overall U.S. market. That was Stewart's last year as lead manager of Core Growth, which is now closed to new investors.
Strategic Income could be a good way to benefit over the long-term from Stewart's 30-plus years of experience. The fund charges 1.49% in annual expenses and levies a 2% redemption fees on shares held less than 60 days. It requires an initial minimum investment of 2,000.