Our 5-step investment process
Wasatch practices a disciplined and unique process that utilizes extraordinarily thorough due diligence, cross-team collaboration, and individual experience (Wasatch portfolio manager industry tenure averages 16+ years) to find better investments. Cross-team collaboration provides unique insights and perspectives to our in-depth analysis, while the final decision on each investment remains with the fund's lead portfolio manager(s). Continue through this page to learn more, or click to see specific information about:
Integral to our investment service is multiple eyes cross-team collaboration. Our multiple eyes service helps portfolio teams pool their knowledge, talent and experience and share it with other teams. Cross-team collaboration is used between teams with different investment styles (growth and value), sizes (smaller cap and larger cap) and scopes (domestic and international).
Before making a formal recommendation, the lead analyst will discuss an investment idea with other analysts (note: all portfolio managers are also first and foremost analysts) who are known to have insight relevant to the specific investment being considered. Each investment idea is then vetted across the entire research team. This takes place via a formal investment recommendation shared with every analyst in the firm. Analysts that may have specific insight into the company, industry, or country will provide thoughts back to the lead analyst for consideration.
The multiple eyes cross-team collaboration also includes a periodic portfolio review called High-End Consulting. During this review, a portfolio manager asks other portfolio managers to subjectively dissect the portfolio—providing thoughts and feedback on investment strategy, portfolio composition and specific holdings. High-end consulting helps portfolio managers look at their portfolio through fresh eyes to make sure that they are not "missing the forest for the trees."
With so much investment exploration going on across the firm it is not unusual for analysts to come across interesting companies that don’t fit the specific style of their own portfolio. Our multiple eyes service makes it easy to pass ideas on to other analysts for appropriate consideration.
JEFF CARDON, CFA, CEO of Wasatch Advisors, Portfolio Manager of Small Cap Growth Fund
Wasatch believes that having many people scrutinize our portfolio holdings leads to the best investment decisions. That’s why our portfolio managers and analysts rely on one another as sounding boards, looking for additional insights and fresh perspectives. We exchange information, challenge each other’s judgments and feel a shared sense of responsibility for every investment Wasatch makes. Because we view multiple eyes as an essential element of our process, we spend considerable time and effort thinking about ways to maintain and improve how we collaborate. We also incentivize this practice by tying a portion of every portfolio manager’s bonus to the overall performance of all Wasatch portfolios.
Step 1: Proprietary screens
We start researching companies by running our own proprietary financial screens across all sectors. We’re looking for trends, consistency, and absolute numbers among a host of metrics that have proven to be good success predictors historically. We use these screens to narrow the investment universe and identify potentially interesting investments. Cross-team collaboration helps analysts and portfolio managers look for and interpret clues from the screens.
Step 2: Study company fundamentals
As our screening reveals companies that appear to be attractive investments, we then go to the fundamentals, searching for information to help us better understand the company’s history, vision, objectives, performance, culture, etc. This includes searching financial databases, reading financial reports, reviewing news articles and collaborating with other analysts who may have knowledge of the company. During this process, we particularly look for companies with a strong business model and a sustainable competitive advantage.
Step 3: Study the broader competitive landscape
We want to understand the company in its broader context. We search for clues in the industry and in the company’s operating environment. We take the unconventional steps of contacting suppliers and customers to shed light on the company's relationships, products, and business plan. We study competitors to more fully understand the industry and the firm’s competitive advantage. We will even use the company’s products or services ourselves when applicable. Our multiple eyes collaboration is at play throughout this process as others in the firm will almost certainly have relevant experience with the industry, competitors and geographies.
Step 4: Meet with management
The quality of a company's management team is critical to us. A brilliant business plan in the hands of mediocre management may fail. An average business plan in the hands of brilliant managers has a greater chance of success. We look for management teams comprised of smart, passionate and talented individuals with a history of success and skin in the game.
They must possess detailed knowledge of their business, their company, and how they are going to win. Company visits allow us to appraise the essence of a company and its management team in the context of its own surroundings. We diligently scrutinize the business model, the competitive advantage, and the financials to understand just how completely the management team has thought through their plans. We are evaluating the management team while looking for yellow or red flags.
If we feel the need to dig even deeper with unknown or less proven management teams, we’ll perform background checks on management—using fully disclosed and above board methods—as another way to ensure that we are placing our shareholder’s assets with worthy stewards.
ROGER EDGLEY, CFA, Director of International Research, Portfolio Manager
We are covering the world quite literally. All of the Wasatch analysts travel extensively, getting out in the field to interview management teams and see company operations firsthand. We’ve found this to be particularly important as many of the international companies we visit tell us that we’re one of the few investment firms that have visited them. We believe that meeting with a company on its home turf is one of the best ways to verify our investment thesis.
Step 5: Value the company
After finalizing our investment thesis, we are ready to value the company. We look out three to five years and make our own projections of where we realistically think the company will be at that time, often building our own proprietary financial models. Based on our three to five year projected revenue, earnings, cash flow, etc., we determine what we believe is a fair price range for the company in three to five years' time. We then calculate the expected return on an investment given its current price. Based on this expected return, we determine what position size to purchase. If the company is very interesting but we believe the stock does not offer an attractive return over the next three to five years due to its current inflated price, we will put it on our watch list. We then look to buy a position if the price temporarily drops at some future point (unless an unforeseen change in our investment thesis causes the drop).
CHRIS BOWEN, Portfolio Manager, Heritage Growth Fund
Unlike many investors, we’ve taken the path of trying to understand the fundamental drivers of a company’s earnings over the next three to five years or more. That’s where we create our advantage. When you talk about what’s really driven performance for Wasatch over the years, it’s getting those long-term stories right and holding onto them.