Two Worthy Funds Re-Open
The Wasatch funds are great examples of how far a little teamwork can go. The employee-owned small-company specialist, which is based in Salt Lake City, at the base of the Wasatch mountain range, likes to cross-pollinate ideas across its 14 funds. The result has been a consistent knack for finding keepers among small-company stocks.
Best of all, two of its previously closed funds have re-opened to investors and may be worth a look: Wasatch Ultra Growth and Wasatch Small Cap Value.
At Wasatch Ultra Growth (WAMCX), the focus is on small companies with strong competitive advantages and earnings growth. Ultra Growth is having a fine year, having returned 15% through November 30. That puts it in the top 16% of all small-company growth funds, according to Morningstar.
But the fund has been a sluggish performer over the past five years. Its five-year annualized return of 11% through November 30 puts it in the bottom 14% of its category.
Co-manager Ajay Krishnan, who has been on the fund since the start of 2000, attributes the underperformance to the absence of energy and industrial stocks. Those kinds of companies are too cyclical for Ultra Growth, which prefers more-consistent companies, typically in technology, health care and the consumer arena, that can perform well in any environment.
Krishnan and co-manager Neal Dihora run screens for growth potential, focusing on earnings and sales momentum. The screens narrow the list to about 200 candidates with market values, generally, of less than $5 billion.
Using Wasatch's team of some 40 analysts, the managers build earnings models for every potential investment, hunting for companies with earnings growth of at least 20% a year and stocks that aren't excessively overpriced. At the end of the day, Krishnan and Dihora end up with about 80 names. The fund's three biggest holdings at last word were Healthways (HWAY), Cognizant Technology (CTSH) and ArthroCare Corp. (ARTC).
Interaction among managers of Wasatch's funds often sparks ideas. The managers of Wasatch Small Cap Value (WMCVX), for example, look for similar qualities in companies as do the folks at Ultra Growth but buy them "when they're on their backs," says co-manager Jim Larkins.
He and partner John Mazanec look for fallen angels, or competitive companies with strong balance sheets that are contending with temporary setbacks. As with the growth fund, earnings models and management quality factor heavily into stock selection.
Small Cap Value has returned 16% annualized over the past five years, placing it in the top 22% of funds that specialized in small companies that have characteristics of both growth and value stocks. The fund has lagged a bit this year, having lost 2% through November 30. That trails the category average by 2 percentage points.
Larkins admits to losing sleep in years like this, when small-company stocks lag the pack and, indeed, lose money. But he worries more about snatching up buying opportunities while they're cheap than about temporary price dislocations among his holdings.
"Hopefully you're running into the burning buildings that other people are running out of," Larkins says. Small Cap Value's three biggest holding at last report were MSC Industrial Direct (MSM), Beacon Roofing Supply (BECN) and Redwood Trust (RWT).
Nine Wasatch funds are open to new investors, including two just created this year: an emerging markets fund and a large-cap value fund. Until they reopened earlier in 2007, both Ultra Growth and Small Cap Value had been closed to new investors for several years.
Managers at each say their funds, both with assets of less than $1 billion, have plenty of room to grow. Wasatch Ultra Growth charges 1.48% in annual expenses, and Wasatch Small Value charges 1.68%.