MoneyLetter Sees Global Small Cap Opportunities at Wasatch

04/12/2018 5:00 am EST

Focus: FUNDS

Walter Frank

CIO, MONEYLETTER

Small- and micro-cap foreign and domestic companies are the investment hunting ground for new model holding Wasatch Global Opportunities (WAGOX), asserts Walter Frank, fund expert and editor of MoneyLetter.

The fund’s portfolio managers — Ajay Krishnan and JB Taylor — seek to identify “the World’s Best Growth Companies that have yet to be broadly discovered.”

Qualities they look for include: strong management; sustainable competitive advantage and market leadership and growing market share with barriers to competitive market entry; potential for strong, sustainable revenue and earnings growth; high return on capital; attractive valuation; and substantial insider ownership.

In addition to growth companies yet to be recognized, the managers may also invest in “fallen angel” growth firms that have had a temporary setback and a compelling valuation.

In looking for these firms, valuation is certainly a key factor, as is quality of management and sustainable competitive advantage, as above. Here, though, the managers are looking for past demonstration of strength and high returns on capital and assets. And, they target firms that can turn around in less than two years.

The managers use a bottom-up process to identify investment candidates. The first step is subject target firms to proprietary financial screens across a host of metrics that have proven to be good indicators of investment success historically.

Trends in revenues and earnings, return on assets, cash flows, and financial statement and balance sheet metrics are analyzed. Qualifying candidates then undergo a deep due diligence vetting.

The managers further analyze the company, its industry, and its competitors. Interviews with management, competitors, suppliers, and customers take place. Finally, the managers look out three to five years to project expected revenue, earnings, cash flow, etc., and ultimately valuation and expected return.

Wasatch believes in a “multiple eyes” approach. Each investment idea is vetted across the entire Wasatch research team, even between teams with different investment styles.

Further, members of the research team undertake periodic portfolio reviews of all funds. Throughout the process, Wasatch’s underlying philosophy is that earnings growth drives stock prices over time.

Generally, this fund will have about 40% to 80% of assets invested in foreign countries, and within that foreign slice, between 10% and 50% of total assets in emerging markets firms. The remainder of assets will be in the US.

As of 2017 year end, 80.6% of assets were in developed markets and 19.4% in emerging markets, primarily Asia emerging markets.

Looking at regions, just under half of assets are invested in North America, nearly 30% in Asia, and 14% in Western Europe. The fund targets small- and micro-cap firms with market capitalizations below $5 billion but note that stocks do grow above that range as they are held in the portfolio.

For the year-to-date through the end of March, Wasatch Global Opportunities has gained 6.0%, outpacing 97% of its small world fund peers. The trailing year return of 31.7% is similarly impressive.

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