Insights / October 6, 2023

Market Scout – “Value” Funds in a Growth Shop

Wasatch’s growth-oriented research team provides advantages to portfolio managers like us who have a non-traditional approach to “value.”

The third quarter of 2023 was negative for stocks as investors fretted over persistent inflation, higher-for-longer interest rates, the threat of a recession and infighting among government bureaucrats. Still, the year-to-date period has been positive for U.S. small-caps as measured by the Russell 2000® Index. To set the stage for our outlook regarding what may lie ahead, it’s helpful to consider market movements in both 2022 and 2023.

Broadly speaking, stocks were down significantly during 2022. Micro- and small-caps fell even more than large-caps. And growth-oriented names performed worse than value names. The main reasons for the declines were spiking inflation and interest rates. Growth stocks were hit especially hard due to their priciness and the greater impact of higher interest rates on growth companies’ cash flows, which are typically weighted further into the future.

In general, the Wasatch funds underperformed their benchmarks during 2022 mainly because the funds have greater growth orientations. Our Small Cap Value and Micro Cap Value funds also underperformed because they tend to invest on the “growthier” side of value.

Year-to-date through September 30, 2023, however, several of the Wasatch U.S. funds—including the Small Cap Value and Micro Cap Value funds—have outperformed their benchmarks. This isn’t surprising because the economy has been strong, and growth and the “growthier” side of value have been back in favor.

Although large-caps aren’t the focus of most of the Wasatch funds, it’s interesting to note that the large-cap indexes were some of the best performers in 2022. Defying expectations, large-caps have again been some of the best performers in 2023—mainly attributable to the massive gains of just several mega-cap tech stocks linked to artificial intelligence (AI).


Given the significant declines in 2022 and the comparatively tepid rebounds in 2023, micro- and small-caps are still a long way from recouping their losses. On the other hand, the large-cap indexes—which include stocks linked to AI—are not far from their all-time highs.

Based on the fact that thousands of micro- and small-caps have continued to underperform in 2023 and that large-cap indexes have been disproportionately powered by AI beneficiaries, observers describe this condition as a narrowing of market breadth. In thinking about the narrowness of breadth, we consider the Wall Street aphorism that says, in order for an upward move to be sustainable, the generals must lead and the troops must follow. In today’s narrow market environment, the generals have mainly been AI beneficiaries and the troops have included thousands of micro- and small-cap stocks.

Clearly, the troops haven’t followed the generals thus far in 2023. So, according to the aphorism, we don’t yet know whether or not we’re in the midst of a sustainable upward move. But our point here isn’t that we should invest based on Wall Street aphorisms. Market conditions change too quickly, and aphorisms don’t make for an effective investment approach. Instead, we mention the generals and the troops because we think the aphorism helps describe what investors should be prepared for psychologically. If investors are prepared, we believe they’ll be better able to ignore short-term volatility and stick to a long-term approach.

With the preceding discussion as context, we think there are two main scenarios for the market. Both scenarios, in our view, are likely to favor micro- and small-caps—at least on a relative basis. That said, at Wasatch we try to build portfolios for all seasons rather than for a specific economic environment.

In the first scenario, the economy could pull off a “Goldilocks” soft landing (or could experience only a minor recession). If this scenario plays out, we think the micro- and small-cap troops will have a greater probability of catching up to the AI generals—which may take a breather.

In the second scenario, the economy could undergo a deeper recession. If this scenario occurs, we think the AI generals and other expensive large-caps will be particularly vulnerable to sharp declines. Meanwhile, we believe micro- and small-caps will hold up relatively well because they haven’t already risen too much since 2022’s market rout.

Although we don’t specialize in macro forecasts, our outlook is closer to the first scenario. A hard landing seems unlikely in the next few quarters. But a modest-growth, muddle-through environment is plausible based on signals from the Federal Reserve and what we’re hearing from the management teams of our companies.


Much of what’s covered above pertains to stock-market movements. Valuations, of course, must also be considered. On this front, we’re very excited about our individual companies.

Additionally, we can compare small-caps as a group versus large-caps as a group. Based on such a comparison, small-caps currently look quite attractive. The chart below shows the relative valuations of the two market-cap groups over time. The dark blue line represents the price/earnings (P/E) multiple of the Russell 2000® Index (small-caps) divided by the P/E multiple of the Russell 1000® Index (large-caps).

For both indexes, the P/E is the weighted-average P/E multiple based on fiscal-year forward earnings of all companies with positive earnings within the respective index. The lower the line is, the more attractive small-cap valuations are relative to large-cap valuations. As you can see, today’s level is the most compelling since 2001—which was in the aftermath of the dot-com crash.


Now we move on to specifically discuss the Wasatch Small Cap Value Fund, which we manage. The Fund began on December 17, 1997 and has a long-tenured investment team. As mentioned, this is a “value” fund but our orientation is on the “growthier” side of value. Although our orientation was detrimental in 2022, it’s been advantageous in 2023. Overall, we’re very pleased with the Fund’s performance, company characteristics, diversification and risk profile.

The Fund’s most appropriate investors could be those who are uncomfortable with the priciness of typical growth-oriented companies but also uninspired by the lackluster nature of many value-oriented names. While the Wasatch Small Cap Value Fund doesn’t offer a typical value approach, it does offer what many investors want—a price-sensitive portfolio of high-quality, dynamic companies with attractive growth rates.

We’ve managed the Fund with the same investment philosophy for decades, but we’re always on the lookout for ways to make incremental improvements to our process. Over the past several years, sector and factor exposures (e.g., growth versus value and interest-rate sensitivity) have intensified in influencing market trends. During this period, members of our team have developed proprietary quantitative and qualitative decision-support tools that help us better understand these exposures—and consider the potential effects on portfolios.

In no way do the decision-support tools change our long-term focus or replace our bottom-up fundamental analysis of individual companies. Like the initial screening process Wasatch has used since the 1970s, the tools simply complement our analysis and help us manage risk through customized portfolio diversification. Our goal is to properly balance portfolios so that our stock picking “alpha” drives performance more than sector and factor overweights and underweights.

Earlier this year, housing, consumer and non-bank financial exposures were significant contributors to Fund performance. Using the decision-support tools in conjunction with fundamental analysis, we recently reduced these exposures somewhat—which we think improved the Fund’s risk profile. At the other end of the spectrum, regional banks generally haven’t done well in 2023 and could be underpriced. The decision-support tools have prompted us to do more stock-specific research on regional banks that could be added to the Fund.

Today, the Small Cap Value Fund’s portfolio consists of companies exhibiting some of the highest-quality characteristics (e.g., returns on capital) we’ve seen in years. Additionally, almost all of the companies have low debt levels. We think these characteristics, among others, position the Fund relatively well for most economic environments.

We like to say that Wasatch Small Cap Value is a “value” fund in a growth shop. We put the word in quotes because we have a non-traditional approach to “value.” In fact, we believe the strong quality- and growth-oriented research capabilities Wasatch has developed since the firm’s founding in 1975 provide us with significant advantages over many traditional value managers.

The small-cap research team at Wasatch seeks to identify the highest-quality growth companies throughout the U.S. We’re members of this team. So when prices falter due to the volatility inherent in small companies, we’re prepared to purchase these same stocks as value names, often ahead of other portfolio managers.


The Small Cap Value Fund isn’t the only “value” fund in the Wasatch growth shop. In fact, the Wasatch Micro Cap Value Fund has existed for over 20 years, starting on July 28, 2003. What’s more, Lead Portfolio Manager Brian Bythrow has helmed the Fund continuously for the entire period since its inception.

Associate Portfolio Manager Thomas Bradley has worked with Brian for over nine years. Prior to becoming the Fund’s Associate Portfolio Manager, Thomas was a Senior Research Analyst on Wasatch’s U.S. micro/small cap team.

As micro-caps, most of the companies in the Fund aren’t household names. In fact, the companies are often overlooked by analysts at major brokerage firms. Brian and Thomas specialize in this less-trafficked area of the market. Under their direction, the Micro Cap Value Fund invests in 70 to 90 companies—primarily with market capitalizations below $1.5 billion at the time of purchase. Up to 30% of the Fund may be invested in international (non-U.S.) holdings.

Wasatch’s newest white paper describes the details of the Micro Cap Value Fund. To read the full paper, please visit the News & Insights section of our website at Several highlights of the paper are presented below.


One year. Five years. Ten years. Since inception. Across all these time periods as of September 30, 2023, the Wasatch Micro Cap Value Fund outperformed its benchmark Russell Microcap® Index. Moreover, the Fund achieved its excellent track record with lower volatility and smaller periodic drawdowns than the benchmark. The Fund has a 4-Star Overall Rating against 562 funds in Morningstar’s Small Growth category, based on risk-adjusted returns for the Fund’s Investor Class as of September 30, 2023. Standardized total returns and performance statistics are presented at

Brian and Thomas seek companies that they consider undervalued relative to industry peers and that they expect will grow faster. They work closely with the entire team of Wasatch portfolio managers and research analysts to identify suitable investments for the Fund. “Sometimes colleagues come across an interesting company that’s too small for their fund but it’s an attractive fit for ours,” says Brian. “At other times, we discover a company that’s outgrown our micro-cap target size but it’s just right for a small- or mid-cap fund.”

The Fund was rated 3, 4 and 4 stars against 562, 527 and 397 funds in the Small Growth category for the 3-, 5- and 10-year periods, respectively, based on risk-adjusted returns of the Investor Class as of September 30, 2023.

Past performance is no guarantee of future results.


“We’re looking for companies that are modestly priced,” Thomas says. “Not necessarily companies that represent deep value but those that are less expensive than what’s typical in a growth portfolio. Also, we want names that aren’t well-known on Wall Street.” In fact, most micro-cap stocks have little or no analyst coverage.

According to Furey Research Partners, companies with market caps below $500 million have, on average, just three analysts covering them. And 45% of these same companies have two or fewer analysts. Without sufficient analyst coverage, the market may not accurately reflect the value of a stock, creating opportunities to acquire good companies at significant discounts to their true worth.

Starting with a universe of modestly priced companies and, when available, downright inexpensive names, Brian and Thomas examine each company one at a time. “It’s as if we’re miners. We turn over a lot of possibilities. Most of them are just rocks, but occasionally we turn over something and find gold.”

Wasatch’s research process includes meetings with company management teams. “We visit most of the companies in the Fund, though not necessarily right away. It doesn’t have to be before an initial investment is made. But over time, we like to have face-to-face interactions on-site, at a conference or in our office.”

Ideally, Brian and Thomas buy companies that are well-priced and that will see an acceleration in revenue and earnings growth. “If we latch onto something really special, we think that with time brokerage analysts will discover it. Moreover, as investors at large become more interested in the companies the Fund owns, demand for the stock increases and the price/earnings (P/E) multiple will often expand—providing another source of returns.”


Most of the companies in the Micro Cap Value Fund can be categorized as Undiscovered Gems, Value Momentum Companies or, occasionally, Fallen Angels. Brian and Thomas define these categories as follows:

  • Undiscovered Gems are companies with what we believe have excellent growth potential that’s gone unnoticed by most analysts and investors. Brian estimates that the majority of the Fund’s holdings were Undiscovered Gems when purchased.
  • Value Momentum Companies have a low valuation relative to the companies’ history or industry peers. But Wasatch has identified a catalyst that may create momentum in the business and in the stock. Value Momentum Companies may not be held for the long term if the stock price readjusts quickly.
  • Fallen Angels are high-quality growth companies that have experienced what Wasatch believes to be a temporary setback. Therefore, the stock price may be below the company’s intrinsic value and could be appealing relative to the long-term growth potential of the business. Having said that, micro-cap Fallen Angels can be prone to keep falling. So Brian and Thomas tread carefully among Fallen Angels, which comprise the smallest portion of the Fund.

As the companies in the Fund succeed, it’s common for Undiscovered Gems to become “earnings compounders” and get discovered by a wider swath of analysts and investors. This discovery process usually leads to a higher valuation and could cause a company to “graduate” out of the Fund.


Brian and Thomas strive to manage the Fund’s overall risk. They prefer not to invest in very expensive growth companies that are continually under pressure to exceed high expectations. “If we invest in companies that are smaller, relatively unknown and less covered, then, if things don’t work out, we think we’re not as likely to experience a steep fall. Hopefully, we’ll be more likely to have a stock that just doesn’t go anywhere for a period of time.”

Brian and Thomas carefully screen companies using a variety of metrics including EV (enterprise value)-to-EBITDA (earnings before interest, taxes, depreciation and amortization) and EV-to-sales. Enterprise value, an industry standard for determining the worth of a company, is calculated by taking the total market capitalization, subtracting the company’s cash balance and adding the amount of debt.

When you look at micro-cap valuations, they’re sometimes less expensive than the overall market because the stocks aren’t as liquid, according to Thomas. “So if you can find companies growing faster than the average business, eventually they may attract attention. When they do, the stocks tend to become more liquid and their prices can rise significantly.”


In conclusion, we’d like to note that in managing the Small Cap Value Fund we share ideas and research with Brian and Thomas on the Micro Cap Value Fund. But given the differences in our investment styles and our target market-cap ranges, the overlap between the funds is currently less than 15%. As a result, investors owning both funds still receive the diversification benefits of two different portfolios of stocks.

With sincere thanks for your continuing investment and for your trust,

Jim Larkins and Austin Bone


Investing in small cap funds will be more volatile and loss of principal could be greater than investing in large cap or more diversified funds. Investments in value stocks can perform differently from the market as a whole and from other types of stocks and can continue to be undervalued by the market for long periods of time. Investing in foreign securities, especially in emerging markets, entails special risks, such as currency fluctuations and political uncertainties, which are described in more detail in the prospectus.

Investing in micro cap funds will be more volatile and loss of principal could be greater than investing in large cap or more diversified funds. Investments in value stocks can perform differently from other types of stocks and from the market as a whole and can continue to be undervalued by the market for long periods of time. Investing in foreign securities, especially in emerging markets, entails special risks, such as currency fluctuations and political uncertainties, which are described in more detail in the prospectus.

An investor should consider investment objectives, risks, charges and expenses carefully before investing. To obtain a prospectus, containing this and other information, visit or call 800.551.1700. Please read the prospectus carefully before investing.

Information in this document regarding market or economic trends, or the factors influencing historical or future performance, reflects the opinions of management as of the date of this document. These statements should not be relied upon for any other purpose.

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 Wasatch Micro Cap Value Fund’s investment objective is long-term growth of capital.

References to individual companies should not be construed as recommendations to buy or sell shares in those companies. Wasatch analysts closely monitor the companies held in the Funds. If a company’s underlying fundamentals or valuation measures change, Wasatch will reevaluate its position and may sell part or all of its holdings. Where performance results of a subset of investments in the portfolio are presented, Wasatch will provide promptly, upon request, the results of the total portfolio from which the performance was derived.

Wasatch Advisors LP, trading as Wasatch Global Investors, ARBN 605 031 909 is regulated by the U.S. Securities and Exchange Commission under U.S. laws which differ from Australian laws. Wasatch Global Investors is exempt from the requirement to hold an Australian financial services licence in accordance with class order 03/1100 in respect of the provision of financial services to wholesale clients in Australia.

Wasatch Advisors LP, doing business as Wasatch Global Investors, is the investment advisor to Wasatch Funds.

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The Morningstar Rating for funds, or ‘star rating’, is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a 3-year history. Exchange–traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product’s monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its 3-, 5-, and 10-year (if applicable) Morningstar Rating metrics. The weights are 100% 3-year rating for 36-59 months of total returns, 60% 5-year rating/40% 3-year rating for 60-119 months of total returns, and 50% 10-year rating/30% 3-year rating/20% 3-year rating for 120 or more months of total returns. While the 10-year overall rating formula seems to give the most weight to the 10-year period, the most recent 3-year period actually has the greatest impact because it is included in all 3 rating periods. The Micro Cap Value Fund was rated 3, 4 and 4 stars against 562, 527 and 397 funds in the category for the for the 3-, 5- and 10-year periods, respectively. The Fund’s other share class may have different performance characteristics. Past performance is no guarantee of future results. 2023© Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.


The Russell 1000 Index is an unmanaged total return index of the largest 1,000 companies in the Russell 3000 Index. The Russell 1000 typically comprises about 92% of the total market capitalization of all listed stocks in the U.S. equity market. It is considered a bellwether index for the performance of large company stocks.

The Russell 2000 Index is an unmanaged total return index of the smallest 2,000 companies in the Russell 3000 Index and is widely used in the industry to measure the performance of small company stocks.

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 Microcap Index is an unmanaged total return index of the smallest 1,000 securities in the small-cap Russell 2000 Index along with the next smallest 1,000 companies, based on a ranking of all U.S. equities by market capitalization.

Indexes are unmanaged. Investors cannot invest directly in these or any indexes.

The Wasatch Small Cap Value Fund and the Wasatch Micro Cap Value Fund have been developed solely by Wasatch Global Investors. The Funds are 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 indexes vest in the relevant LSE Group company, which owns these indexes. Russell ® is a trademark of the relevant LSE Group company and is used by any other LSE Group company under license.

These indexes are 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 Wasatch Micro Cap Value Fund or the suitability of these indexes for the purpose to which it is being put by Wasatch Global Investors.

Diversification is a strategy that mixes a variety of investments within a portfolio in an attempt to reduce risk. Diversification does not eliminate the risk of experiencing investment losses.

Earnings acceleration is the incremental growth in a company’s earnings per share (EPS). It can be useful in identifying companies whose share price is increasing due to positive earnings momentum or growth in EPS.

An earnings compounder is a company that consistently generates earnings growth and reinvests those earnings to generate additional growth over time. The compounding effect can result in the company’s earnings growing exponentially, as the initial investment and subsequent reinvested earnings generate their own gains over time.

Earnings growth is a measure of growth in a company’s net income over a specific period, often one year.

Enterprise value (EV) is a measure of a company’s value calculated as market capitalization plus debt, minority interest and preferred shares, minus total cash and cash equivalents.

The EV-to-EBITDA ratio is used to determine the value of a company. It is computed by dividing the company’s Enterprise Value (EV) by its earnings before interest, taxes, depreciation, and amortization (EBITDA). A lower ratio can indicate that a company is undervalued, while a high ratio can indicate that a company is overvalued.

The forward price-to-earnings (P/E) multiple is a company’s market price per share divided by the expected earnings per share. The forecasted earnings used in the formula can be for the next 12 months or for the next full-year fiscal period.

Intrinsic value is the value of a company’s stock based solely on its fundamentals, independent of its market price.

P/E multiple expansion refers to an increase in a stock’s price-to-earnings (P/E) multiple over time.

The price/earnings (P/E) ratio, also known as the P/E multiple, is the price of a stock divided by its earnings per share.

Return on capital is a measure of how effectively a company uses the money, owned or borrowed, that has been invested in its operations.

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