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

Investor Class | Institutional Class
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Concentrating on Our Best Ideas
by Jim Larkins

“While all active investors strive to pick the right stocks, an often overlooked aspect of portfolio management is the impact position sizes can have on performance over time.”

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For the period ended September 30, 2018, the average annual total returns of the Wasatch Small Cap Value Fund for the one-, five- and ten-year periods were 14.54%, 12.31% and 12.49%, the returns for the Russell 2000 Value Index were 9.33%, 9.91%, and 9.52%, and the returns for the Russell 2000 Index were 15.24%, 11.07%, and 11.11%.  Expense ratio: Gross 1.41%.


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.


U.S. equities continued to grind higher in the third quarter, as the ongoing strength in economic growth and corporate earnings helped offset concerns about U.S. trade policy. The Russell 2000 Value Index advanced 1.60%, bringing its year-to-date return through September 30, 2018 to 7.14%. The value stocks in the Index, while producing a healthy gain, nonetheless trailed the growth stocks in the Russell 2000 Growth Index.

This backdrop proved favorable for the Wasatch Small Cap Value Fund. The Fund’s Investor Class gained 2.65% for the quarter and outperformed the Russell 2000 Value benchmark. Since we hold many “Fallen Angels”—growth companies that have hit a bump in the road and slid into value territory—we tend to have a higher weighting in growth companies than the Index. This blended approach to value investing, in addition to aiding results in the third quarter, has also contributed to the Fund’s outperformance versus the benchmark over the one-, five- and 10-year periods.

Details of the Quarter

While all active investors strive to pick the right stocks, an often-overlooked aspect of portfolio management is the impact position sizes can have on portfolio performance over time. A number of years ago, we determined that establishing larger weightings in our best ideas would help maximize the impact our research had on performance results. The Fund has slowly changed as we have sought to put this insight to work. First, we have eliminated positions below 1% of assets. In general, the only times we will hold a lower weighting is when we are initially building up a position or when we are in the process of eliminating a stock from the Fund. The result is a lower number of holdings, which helps preserve our intellectual capital by allowing us to focus on a more select list of companies. Second, we have established larger weightings in stocks in which we have the highest level of conviction. Our largest positions are typically in stocks where a company’s fundamentals are improving, yet the valuation is still attractive. As long as a company’s fundamentals continue to improve, we are willing to allow the position to grow larger in the Fund as the stock appreciates in price.

We believe this strategy has been paying off. Many of the Fund’s top third-quarter contributors were also among our largest positions. The three leading contributors to performance—Euronet Worldwide, Inc. (EEFT), Monro, Inc. (MNRO) and HEICO Corp. (HEI.A)—were three of our largest holdings. In all three cases, we established the positions when investor expectations were low, but we saw the potential for a turnaround in their underlying business trends. Our thesis has begun to play out in all three of the companies mentioned above, contributing to the Fund’s third-quarter outperformance of the benchmark. We retained a full weighting in each, illustrating our approach of allowing the stocks of undervalued companies to “run” when their fundamentals are improving rather than quickly trimming back the size of the positions. By design, we seek to build the Fund’s portfolio with companies whose businesses can thrive for multiple years and not with those that simply stage a quick recovery from undervalued levels. In this way, we try to “water the flowers and pull the weeds” and not the opposite.

On the other side of the ledger, Knight-Swift Transportation Holdings, Inc. (KNX) was a top holding that lagged significantly. Investors appear to have lost confidence in the company after a weaker-than-expected earnings report, leading to a sharp decline in its share price in late July. Our analysis showed that the downturn was largely the result of investors overreacting to short-term issues instead of deterioration in the company’s profit margins or longer-term earnings outlook. Believing Knight-Swift is a well-managed company that stands to benefit from the ongoing strength in the U.S. economy, we used the selloff as an opportunity to significantly add to our position.

The weakness in Knight-Swift was offset by the robust performance of many other holdings in the industrials sector. We hold a number of what we regard as higher-quality, growing industrial companies that performed well over the past three months—including Kadant, Inc. (KAI) and HEICO (mentioned above)—which added to the Fund’s return.

On the negative side, we lost some performance through stock selection in the financials sector, primarily due to our holdings in small banks. Banks are sensitive not only to the direction of interest rates, but also to the “shape” of the yield curve. They typically perform well when there is a healthy margin between short- and long-term rates, but this gap compressed significantly in July and August. We view this as a short-term factor, and not one that is especially relevant to our decision-making since we don’t invest on the basis of expected rate movements. Instead, we focus on owning banks with competitive advantages such as outstanding management teams, low-cost funding strategies, or unique loan platforms that allow for more rapid growth.

Outside of the financials sector, National Storage Affiliates Trust (NSA) and Camping World Holdings, Inc. (CWH) were two notable detractors. National Storage lagged due to concerns about an increased supply of storage units in the United States, but we believe it is a well-managed company with durable assets and a track record of growing its business through intelligent acquisitions. Recreational-vehicle retailer Camping World was also hurt by elevated industry inventories, but we expect the issue will be resolved by the spring selling season. We believe Camping World retains a robust market position through its large distribution network and its ability to capitalize on data-mining opportunities created by its two-million-strong membership club. (Current and future holdings are subject to risk.)

Outlook and Positioning

While the ongoing rally of U.S. stocks has provided a tailwind for the Fund, it has also led to higher valuations across the market. As a result, we have become much more deliberate in adding new investments. In the third quarter, for instance, we added just two new companies. From a broader standpoint, we’ve been considering the “value versus growth” question more heavily as we’ve managed the Fund over the past several months. Since growth stocks have largely outperformed—and therefore have been more likely to reach full valuations—we’ve looked for more opportunities to add companies with strong characteristics that still appear to be attractively valued. We believe the net result of this process is a blended portfolio with the potential to participate in the market’s upside no matter which style happens to be in favor.

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 indexes.

The Wasatch Small Cap Value Fund has been developed solely by Wasatch Advisors, Inc. The Wasatch Small Cap Value Fund is not in any way connected to or sponsored, endorsed, sold or promoted by the London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). FTSE Russell is a trading name of certain of the LSE Group companies.

All rights in the Russell 2000 Value Index vest in the relevant LSE Group company, which owns the Index. Russell ® is a trademark of the relevant LSE Group company and is used by any other LSE Group company under license.

The Index is calculated by or on behalf of FTSE International Limited or its affiliate, agent or partner. The LSE Group does not accept any liability whatsoever to any person arising out of (a) the use of, reliance on or any error in the Index or (b) investment in or operation of the Wasatch Small Cap Value Fund or the suitability of the Index for the purpose to which it is being put by Wasatch Advisors, Inc.

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.

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

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

The yield curve is a line on a graph that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity dates. The most frequently reported yield curve compares three-month, two-year, five-year and 30-year U.S. Treasury securities. This yield curve is used as a benchmark for other interest rates, such as mortgage rates or bank lending rates. The curve is also used to predict changes in economic output and growth.


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.   Russell Investment Group is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Russell Investment Group. 

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.

Read our Holdings Release Policy and why we have one.