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Meet the Family: Wasatch Funds

Wasatch Funds
Assets Under Management: $923 million in retail mutual funds
Percentile Rank of Average Fund Over Three Years: Top 22% out of 100% (not counting U.S. Treasury fund, subadvised by Van Robert Hoisington)
Family's Top Three Stock Holdings:
O'Reilly Automotive(ORLY - Get Report),
Rent-A-Center(RCII - Get Report)
Minimum Initial Investment: $2,000
Meet the Family Q&A: Wasatch Micro Cap and Small Cap Value manager Robert Gardiner
Phone: 800-551-1700
Source: Wasatch

It's perfectly understandable why tiny Wasatch , operating in the hinterlands of Utah, would fly beneath the radar screens of many investors.

For one thing, it doesn't advertise. For another, its asset base is minuscule -- its six funds collectively claim a mere $923 million in assets. (One of those funds, (WHOSX), is subadvised by a different manager, so it's not discussed in the profile.)

But the no-load fund family deserves a second look from investors looking to place their bets in the small-stock arena. Over the past year, all five of Wasatch's small-cap oriented funds have performed in the top decile, ranked against their peers. Two funds, (WMCVX) and (WMICX), claim membership in an even more elite group, ranking in the first and third percentile, respectively. ( conducted an interview with Robert Gardiner, who manages both funds.)

Rather than racing out to publicize the hot-performing Micro Cap, Wasatch closed it to new investors last spring, when its assets were at about $200 million. In a similar bid to avoid asset bloat -- which makes it difficult for small-cap funds to move nimbly in an out of their less-actively traded stocks -- management has said it may soon shut Small Cap Growth as well. That kind of discipline is laudable in an industry where asset gathering is the name of the game.

The Wasatch Fund Family
Fund Net Assets
($ Mil)
1-Yr. Return 3-Yr. Return 1-Yr. % Rank in Cat.(1=Best, 100=Worst) Expenses Manager Start Date
(WGROX) 306 33.3% 14.3% 4 1.44 12-06-86
(WMICX) (Closed) 221 48.4 25.1 1 2.46 06-19-95
(WAAEX) 234 25.6 18.7 10 1.44 12-06-86
(WMCVX) 50 35.8 -- 3 1.95 12-17-97
(WAMCX) 53 25.6 14.9 10 1.75 08-16-92
(WHOSX) 58 12.4 6.1 6 0.75 07-31-96
Source: Morningstar.

In keeping with its off-Wall Street culture, managers at Wasatch tend to stick around. The fund family, founded in 1975, prides itself on its ability to groom and retain homegrown talent. Gardiner, for example, first worked at Wasatch as a part-time bookkeeper while in high school. Two other managers, Sam Stewart at Core Growth and Jeff Cardon at Small Cap Growth, have headed the funds since their inception in 1986.

Wasatch funds tend to have stakes in technology, health care and business services because those areas have been identified as having good growth prospects. But Wasatch managers don't shift in and out of sectors in attempts to time the market. That philosophy contributes to an annual turnover rate of about 73% at the funds, compared with an average of 103%. Lower turnover -- a gauge for how often managers sell out of old holdings and buy into new positions -- often makes for better tax bills for shareholders.

Wasatch Favorites
The 10 most-held stocks in the family
Stock Performance YTD
O'Reilly Automotive(ORLY - Get Report) -13.4%
Lincare Holdings(LNCR) 18.6
Rent-A-Center(RCII - Get Report) 30.6
Men's Wearhouse(MW) -6.0
ICU Med(ICUI) 77.0
Orthodontic Centers(OCA) 179.6
AmeriCredit(ACF) 29.7
Express Scripts(ESRX) 14.5
FYI(FYII) 14.2
Microchip Technology(MCHP) -7.9
Sources: and

What's not to like about Wasatch funds? Well, expenses are fairly high. The fund family has taken a principled stand against the 12b-1 fees typically used in marketing. But regular operating expenses are high -- 1.80% for its five funds, compared with expenses of 1.38% for the average fund. And the two funds with the best recent performances, Micro Cap and Small Cap Value, are the worst culprits, with respective expenses of 2.46% and 1.95%.

Also, Wasatch puts its dollars in a relatively risky space. As Wasatch itself points out in its fund material, small- and micro-cap stocks may be subject to "erratic fluctuations" in price because the companies sometimes lack the product diversification and experience of their larger counterparts.

One former standout in the group has seen its own zigzags in performance. The mid-'90s saw great returns at (WAMCX) (then known as Mid Cap), which helped Wasatch attract nearly $400 million in assets in a single year. But the fund suffered steep drop-offs not long afterward, finishing in the bottom 10% during the next couple of years.

Since then, Ultra Growth has continued to see some volatile swings. Morningstar analyst Bradley Sweeney noted in a fund review that the fund has finished every calendar year since 1993 in either the category's top or bottom quintile. (Karey Barker, who has headed Ultra Growth for eight years, will soon roll out a new global technology offering for Wasatch with Ajay Krishnan, an analyst who was promoted to co-manager alongside her earlier this year.)

Most of the Wasatch funds have charted a steadier course. (WGROX), a small-cap blend fund that's been around since the end of 1986, has amassed an impressive long-term record. Its 10-year annualized average return of 19.8% puts it in the top 19% of its category.

Through October, Core Growth racked up a 27% return, outpacing its peers by a 17-point margin. How? For one thing, it never overloaded on technology. By the end of the third quarter, the fund had 11% in the sector. The low stake in tech is a byproduct of manager Sam Stewart's standards for earnings and valuations. "Technology tends to be low because Core Growth places such heavy emphasis on owning companies that have five-year-out predictable earnings," Stewart says. That's hard to do for most tech companies, he says.

Instead of stocking up on tech, Core Growth loaded up its shopping cart with health care companies with dependable earnings -- a group that was on the discount at the beginning of the year, but ended up performing well.

Another solid performer is (WAAEX). Its three-year record lands it in the top third of similar funds. It has been more aggressive than its blend counterpart, allocating about a third of its portfolio to technology. (Health care and services make up most of the rest.)

Where does credit lie for all the strong performances of late? It hasn't hurt that Wasatch's stock pickers have consistently shied away from dot-coms on the basis of their high prices and what the managers viewed as a lack of sustainable advantages.

"We're pretty heavily invested in tech, and always have been," skipper Gardiner says. "But we didn't believe for a second in the New Economy valuation metrics. We have a philosophy of owning reasonable and rational prices."

Wasatch's definition of a reasonable price: a price-to-earnings ratio roughly equal to a company's five-year earnings growth rate.

Generally, managers at the fund family look for small companies (with market caps under $1.5 billion) with good management track records, high degrees of insider ownership and sustainable competitive advantages. There's a fair amount of cross-ownership among the funds; at weekly meetings, managers critique each other's portfolios and sometimes end up buying the same stocks.

By Gardiner's account, managers aren't all that interested in figuring out how the larger small-cap market will act. "Our whole focus is a bottom-up approach, rather than top-down, predicting what the small-cap market will do," he says.

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