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A Fund That's Outgrowing The Small Fry


Wasatch Funds, which manages $9 billion in assets, offers some of the best-performing small-company funds. The big problem is that all of Wasatch's six U.S. diversified funds are closed to new investors. The only way in is through the two-month-old Wasatch Heritage Growth Fund, which invests in midsize- and large-company stocks. It's new ground for Salt Lake City's Wasatch, but many of the stocks are successful companies that have outgrown the small-cap funds. Personal Business Editor Lauren Young spoke with Samuel Stewart, Wasatch's chief executive officer, about the new offering.

Why launch a large-cap fund now?

We aren't opening this fund because we think it's a good time to invest in large caps, although certainly valuations look more compelling. We actually tested this fund for two years with a paper portfolio before we introduced it.

This really isn't about raising money, either. As a firm, we have all the assets we need. The reason we launched the fund is that it has some value added for our existing funds. If we can do this right, we will be better investors. That's because many of the small companies we invest in have bigger competitors out there. The more we know about the big companies in a sector, the more we understand the smaller companies we already own.

To really understand the small companies we invest in, we need to research the larger, leading companies in an industry. A classic example is AutoZone (AZO) and O'Reilly Automotive (ORLY). O'Reilly is an automotive-parts company that Wasatch has invested in for 10 years. But the big guy in the industry is AutoZone, so we've also been talking to AutoZone management and constructing earnings models for the company for a long time, even though we couldn't own it in the small-cap funds.

What kinds of stocks are in the fund?

We invest in companies with strong competitive positions in markets that have serious headroom. A company must have the ability to increase its earnings or some other important valuation metric by a factor of two over the next five years.

For this fund, we are focusing on stocks in the $3 billion-to-$20 billion range. Some of the companies in the portfolio are Wasatch graduates -- ones we owned in our small-cap funds that are now getting too big to fit the funds' parameters.

We still have Express Scripts (ESRX), with a $6 billion market capitalization, in some of the small-cap funds. The mail-order pharmacy company is one we like, and it still seems to be doing fine, but it no longer fits the small-cap definition. The other kinds of companies we buy are larger peers of companies we already own.

What are some other Wasatch graduates that might go in the new fund?

Medical-device maker Medtronic (MDT) is a company that we used to own, but it grew too large for the funds. Now it's something we own again in the new fund. It's the same thing with Countrywide Financial (CFC). Countrywide is one of the bigger mortgage lenders in the U.S., and we've got a lot of small ones in our small-cap portfolio.

Do you think we are at the end of the small-cap cycle?

Most people who look at the market say small-cap cycles last for six years or so, and plenty of them will say small caps are more expensive. We do recognize that the valuations could go against us for a while in small-cap land. But no matter what the market cap is, we want to find a good company at a reasonable valuation.


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