Fund Detects Disruption Among Markets

Fund Watch

Wasatch Ultra Growth Targets Industry Disruptors

This fund invests in small firms intent on wiping out the competition.

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Investing in small, fast-growing firms isn't for the faint of heart. Over the past 10 years, the Russell 2000 Growth index, which tracks stocks in small, growing firms, has been 42% more volatile than the broad market benchmark, Standard & Poor's 500-stock index. Finding a winning firm still in its infancy can provide a huge payoff, but investors hoping to get in on the ground floor with the next Amazon.com (symbol AMZN) or Net­flix (NFLX) are in for bumpy ride.

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Those two firms are disruptors—companies with products or services that make other firms in their industries obsolete. When building his portfolio of small-company stocks, Wasatch Ultra Growth (WAMCX) manager John Malooly considers a firm's potential to disrupt its industry—as well as the likelihood of it being disrupted itself. The port­folio holds 70 to 90 stocks, and prospective holdings must have a market value of less than $5 billion at the time of purchase. But Ma­looly isn't afraid to let his winners run. Veeva Systems (VEEV) stock, which the fund purchased in 2017, now sports a $21 billion market value.

The fund dedicates about 20% of assets to what Ma­looly calls ballast stocks—growing firms, such as discount retailer Five Below (FIVE), that are unlikely to be roiled by competition—to add stability to the portfolio's returns.

But the bulk of the portfolio is dedicated to companies that have the potential to unseat the competition. These firms have business models that incumbent firms can't compete with, or they offer lower price points that competitors can't match. Ra Medical Systems (RMED), for instance, makes a sleep apnea treatment for patients who don't want to wear a mask; and Wayfair (W) sells furniture online at low costs. Malooly particularly favors firms with hefty recurring revenues, which he says makes growth in the business more predictable. Firms in Ultra Growth's portfolio boost revenues at a 21%-to-23% annualized clip, on average, says Malooly.

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Since Malooly took the helm in early 2012, Ultra Growth has posted an annualized return of 14.8%, an average of 3.3 percentage points per year ahead of the Russell 2000 Growth index. The fund's 1.25% expense ratio isn't a bargain, but it's in line with the typical fund that invests in small, growing firms.

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