Last month we purchased Fidelity Limited Term Bond (FJRLX) in our model portfolio. Part of our strat...
A Growth Fund That’s a True Value
07/15/2008 12:00 am EST
Russel Kinnel, editor of Morningstar FundInvestor, finds a small-cap growth fund that holds investments for years and whose stock holdings trade at value multiples.
Recently reopened Wasatch Small Cap Growth (WAAEX) has [great] long-term potential. (Selected by analyst Greg Brown, it is one of 150 Analyst Picks in the Morningstar 500 top funds—Editor.)
[Manager] Jeff Cardon joined Wasatch in 1980 as an analyst and was put in charge of this fund at its 1986 inception. Cardon has spent nearly 22 years at the helm, which makes him the longest-tenured manager in Morningstar’s database of small-cap growth funds.
Cardon focuses on stocks with market capitalizations below $1.5 billion, favoring those with sustainable earnings growth rates of at least 15%. Although many small-cap growth funds are trading fiends, Cardon is a buy-and-hold investor, and the fund’s turnover rate implies a holding period of two or more years.
This fund is on the conservative side of growth. Management tends to stick with well-run companies trading at reasonable valuations. Indeed, the fund’s price/sales and price/cash flow are half those of peers. Wasatch has built a strong research reputation for ferreting out financially healthy firms with defendable competitive advantages. For example, Cardon picked up automotive recycled parts provider LKQ because the firm occupies a unique niche in the automotive parts market and is a dominant player in that industry.
Also, Cardon’s in-depth knowledge of LKQ’s management gives him confidence in their ability to continue the company’s steady growth. Cardon treads lightly among cyclical fare and has virtually avoided names in the industrial materials and energy sectors.
The fund has struggled in recent years, but over the long term, management has proved its worth. A big reason for the lackluster performance over the past five years is management’s aversion to the energy and materials sectors. Small-cap funds that have invested in these areas have been richly rewarded in recent years. Funds that have avoided those hot areas have been left in the dust.
But this fund has still put up decent returns despite this massive head wind—a testament to management’s stock-picking prowess. Over the long term, the fund is a standout. The fund’s 15-year returns are outstanding, and its since-inception returns since its inception are equally inspiring.
Wasatch has a strong history of shareholder-friendliness and it has created a true investment culture, focusing on research and growing its analyst staff rather than increasing its sales staff or assets under management. It has a history of closing funds early to keep total assets manageable. Every portfolio manager has money invested in his or her funds, and Jeff Cardon has more than $1 million in Wasatch Small-Cap Growth.
This fund’s 1.19% expense ratio is below average for no-load funds in this category. The advisor has shown its shareholder-friendliness by lowering fees as assets under management have increased over the past ten years.
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