Wasatch Small Cap Value Fund® (WMCVX)  Invest in this Fund 

Investor Class | Institutional Class
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Q4 2014
Our Unique Approach Fueled Outperformance in 2014
by Jim Larkins

“We see the small cap market as a ‘perpetual motion machine’ where good companies continually fall to attractive prices when they hit bumps in the road.”

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For the period ended December 31, 2014, the average annual total returns of the Wasatch Small Cap Value Fund for the one-, five- and ten-year periods were 7.40%, 15.46% and 6.91%, the returns for the Russell 2000 Value Index were 4.22%, 14.26%, and 6.89%, and the returns for the Russell 2000 Index were 4.89%, 15.55%, and 7.77%.  Expense ratio: Gross 1.27% / Net 1.27%.


Data shows past performance, which is not indicative of future performance. Current performance may be lower or higher than the data quoted. To obtain the most recent month-end performance data available, please click on the “Performance” tab of the individual fund under the “Our Funds” section. The Advisor may absorb certain Fund expenses, without which total return would have been lower. Investment returns and principal value will fluctuate and shares, when redeemed, may be worth more or less than their original cost.

Wasatch Funds will deduct a 2.00% redemption proceeds fee on Fund shares held 60 days or less. Performance data does not reflect the deduction of fees, including sales charges, or the taxes you would pay on fund distributions or the redemption of fund shares. Fees and taxes, if reflected, would reduce the performance quoted. Wasatch does not charge any sales fees. For more complete information including charges, risks and expenses, read the prospectus carefully.

Wasatch Funds are subject to risks, including loss of principal.


Domestic small-cap value stocks, as gauged by the Russell 2000 Value Index, rebounded from their third-quarter loss to post a gain of 9.40% during the final three months of the year. The Wasatch Small Cap Value Fund—Investor Class gained 4.57% and underperformed the Index. From a sector perspective, most of the underperformance resulted from our significantly underweight position in financials, where there are fewer opportunities to find companies that fit our investment discipline. Our overweight position in the energy sector also detracted from relative performance, while information technology and industrials were areas of relative strength.

Despite the quarter’s underperformance, we closed the year with a strong total return that outpaced the benchmark, and we remain ahead of the Russell 2000 Value Index on a five-year and longer-term basis as well. Our goal is to invest in companies with business models highlighted by recurring revenues, deeply entrenched customer bases, and lack of excessive competition. We are particularly interested in companies that Wall Street hasn’t discovered yet. One result of this strategy is that the Fund’s holdings can deviate widely from those in the benchmark, which inevitably translates to periodic divergences in short-term performance. However, our unique strategy has historically succeeded in delivering outperformance for our investors over time.

Details of the Quarter

The Fund’s fourth-quarter underperformance largely stemmed from the shortfall in our Quality Value strategy, which seeks to invest in companies that feature not just traditional value characteristics, but also a specific attribute—such as an exceptional business model—that sets them apart. Our Fallen Angel and Undiscovered Gems strategies both performed well, but not to a sufficient extent to offset the challenges in Quality Value.

Quality Value struggled due to the well-publicized downturn in energy stocks. While we recognize the volatility inherent in commodity-based investments such as oil and gas exploration companies, we were disappointed with the performance of many of our holdings. Some of the underperformance was explained by deterioration in balance-sheet strength, which was the case with Comstock Resources, Inc. (CRK). We elected to exit this position due to the company’s rising debt and lack of hedging against volatility in oil prices. In other cases, the issue seemed to be higher sensitivity to energy prices than the average company in the sector, including our positions in the seismic-equipment companies Geospace Technologies Corp. (GEOS) and TGS-NOPEC Geophysical Co. ASA. For the majority of our holdings, however, we believe the sell-off was largely the result of broader weakness in the sector rather than company-specific developments. For instance, one of our largest detractors was Northern Oil and Gas, Inc. (NOG). The stock lost ground even though the company has a strong program for hedging against oil and gas price declines and a more conservative balance sheet than many of its industry peers.

We elected to reduce the Fund’s overall weighting in energy, as we believe the current imbalance of supply and demand in the oil market may lead to additional volatility in oil prices well into 2015. However, we increased our weighting in World Fuel Services Corp. (INT), a fuel-distribution company that can benefit from the increased volatility in energy prices. One of its largest competitors declared bankruptcy during the quarter, which should improve the competitive environment for World Fuel. 

Summit Hotel Properties, Inc. (INN) was a notable bright spot in our Quality Value strategy. This hospitality real estate investment trust (REIT) continued to benefit from both increased occupancy and rate increases in its select-service hotel offerings. We also hold a position in CareTrust REIT, Inc. (CTRE), a health-care REIT that was spun out of our long-time holding The Ensign Group, Inc. (ENSG). We see this as compelling investment opportunity that is being ignored by the market—which can happen with spin-offs when analysts don’t pick up coverage of the new company. The REIT space in general looks attractive to us, but a run-up in prices during the quarter has made it more challenging to find attractively valued opportunities.

Our Fallen Angel strategy, which focuses on owning fundamentally sound, growing companies whose stocks have temporarily slid into value territory, also performed well during the fourth quarter. We believe that improving employment figures and lower gasoline prices helped many of the companies in this category. Within the Fallen Angel strategy, many of our retail stocks delivered strong performance, as did a number of technology and business-services companies. Vistaprint, which renamed itself Cimpress N.V. (CMPR) during the quarter, saw continued improvement in small-business printing services. We have followed and owned this company for many years, and we believed that its disciplined management team would achieve its goals for a turnaround—an event that indeed played out during the quarter. We have taken some modest profits, but we continue to hold Cimpress as a top weighting given the company’s improving fundamentals and attractive valuation.†† Select Comfort Corp. (SCSS), a manufacturer and retailer of mattresses, experienced a breakout quarter after a long turn-around. Shares of AVG Technologies N.V. (AVG), a provider of security services to consumers in the mobile and computer space, also rallied after the company made a transformative acquisition.

Our Undiscovered Gems strategy—which emphasizes stocks with strong fundamentals that haven’t been recognized by Wall Street—delivered positive performance for the Fund as well. Our positions in trucking companies such as Knight Transportation, Inc. (KNX) and Universal Truckload Services, Inc. (UACL) gained ground amid the continued strengthening of the U.S. economy. Allegiant Travel Co. (ALGT), a leisure-oriented airline, also added value as lower fuel prices increased its profitability outlook.


In a reflection of the volatile market environment, our portfolio activity picked up during the fourth quarter. As is typically the case, we reduced or exited positions where the fundamental story appears to be deteriorating. These included Polypore International, Inc. (PPO), for which we expect to see lower demand in its electric-car battery business, as well as Northwest Pipe Co. (NWPX) and CorVel Corp. (CRVL), both of which experienced rising competition. We sold nutritional-supplement provider USANA Health Sciences, Inc. (USNA), which had performed well. We redeployed the proceeds of these sales into several new positions.

We hold an optimistic outlook for the coming year, as the earnings outlook for many of our holdings is anchored by the improving U.S. economy, coupled with the “tax cut” of lower energy prices. However, higher overall valuations for the asset class could fuel continued market volatility, so we are looking to avoid taking undue risk in the Fund. Still, we see the small-cap market as a “perpetual motion machine” where good companies continually fall to attractive prices when they hit bumps in the road. As a result, we believe the small-cap universe remains home to an abundance of stock-specific opportunities, even though the asset class as a whole appears fairly valued.

Thank you for the opportunity to manage your assets.


Jim Larkins


**The Russell 2000 Value Index measures the performance of Russell 2000 Index companies with lower price-to-book ratios and lower forecasted growth values.

The Russell 2000 Index is an unmanaged total return index of the smallest 2,000 companies in the Russell 3000 Index, as ranked by total market capitalization. The Russell 3000 Index is an unmanaged total return index of the largest 3,000 U.S. companies based on total market capitalization. The Russell 2000 Index is widely used in the industry to measure the performance of small company stocks.

You cannot invest directly in these or any indices.

The Wasatch Small Cap Value Fund’s investment objective is long-term growth of capital. Income is a secondary objective, but only when consistent with long-term growth of capital.

††Valuation is the process of determining the current worth of an asset or company.

The Russell 2000 Value Index measures the performance of Russell 2000 Index companies with lower price-to-book ratios and lower forecasted growth values.   The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index.   You cannot invest directly in indexes.  

You cannot invest directly in indexes.

View the Small Cap Value Fund’s most current Top 10 Holdings

Portfolio holdings are subject to change at any time. References to specific securities should not be construed as recommendations by the Funds or their Advisor.

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