One important difference in mutual funds is how its holdings are selected. A fund with active management implies there is a portfolio manager and/or team who actively research current and new holdings for a fund’s portfolio. Decisions are made based on research and the manager’s own analysis.
Funds that are passively managed are set up to match the performance of an overall market or a benchmark. Instead of personal research, passive fund managers rely on computer models that select holdings in the same proportions as the index the fund is trying to match.
At Wasatch, we believe that active management can help our investors take advantage of inefficiencies in the market that might not be readily apparent or captured by a passive management style. For instance, a great company management can’t be quantitatively measured. Likewise, a company may look good on paper, but a sense of chaos or mistrust might convince a portfolio manager that the company is not a wise investment. By relying on the intelligence, experience, and intuition of our portfolio managers, Wasatch Funds believes active fund management adds significant value over passive or index funds. Read more about our fund management style in the Wasatch Way here.
Fund managers work to achieve a fund’s investment objective by focusing on certain types of holdings in the portfolio. There are three basic types of mutual fund portfolios:
Stock funds invest in corporations. Most stock funds select a geographic and market capitalization category to meet their investment objectives. Stock funds typically carry higher risks than Bond or Money Market funds. They are generally best for long-term investors who can ride out market fluctuations.
Bond funds purchase bonds sold by government entities or other organizations that wish to borrow money from the investor. Bonds are typically less volatile than stocks. Individuals looking for investments with less fluctuation potential than stock funds may choose to invest in bond funds.
Money market funds invest in short-term debt obligations like Treasury bills, certificates of deposit, and commercial paper. A money market fund aims to protect the value of your invested principal. It has the lowest risk of the mutual fund types, and in general, the lowest return.
A stock mutual fund may invest in corporations of a particular size or market capitalization, also referred to as . We generally define these companies as:
Large cap, companies valued at $20 billion or more
Mid cap, companies valued from $3-20 billion
Small cap, companies valued from $1 billion to $3 billion
Micro cap, companies valued under $1 billion
Mutual funds can focus on a particular geographic area in selecting investments.
Domestic stock funds primarily invest in companies located in the United States.
International stock funds primarily invest in companies outside of the United States.
Global stock funds may invest in both domestic and international companies.
Global and international funds add an additional level of diversification as they may include several geographic economies.
A fund company will define an investment objective for a mutual fund—the objective or “style” is often revealed in a fund’s name. The investment style of a fund may be important in achieving certain goals in a personal investment strategy.
Growth funds focus on companies with significant earnings or revenue growth potential.
Value funds invest in companies believed to be temporarily undervalued.
Blend funds invest in a blend of growth and value companies.
Wasatch Funds offers a variety of growth and value funds in several disciplines. Wasatch’s original growth funds, the Wasatch Small Cap Growth and Core Growth Funds, were launched in 1986. In 1997, we launched our first value fund—with a unique “growthy value” approach—that produced solid results at its 10-year anniversary. Click here to learn more about how Wasatch defines growth and value investing.