Insights / September 24, 2019

The Wasatch Select Approach

Global mid caps with outstanding growth potential.

At Wasatch Global Investors, we got our start managing strategies that invest in U.S. companies with micro and small market capitalizations. We’ve since expanded into international developed markets and emerging markets. Moreover, we’ve had quite a bit of success in these areas. Our Select strategies focus on investing in highquality, longduration growth companies that have moved beyond the smallcap range.

A central Wasatch investment theme is to identify and own the highestquality companies that possess identifiable, sustainable competitive advantages, are wellmanaged, and are producing aboveaverage earnings growth relative to their industries and countries of origin. We’re willing to dig deep to find great companies. And we have a proven track record of doing so, although past performance is not necessarily indicative of future results.

In our research to find great companies, we’re most interested in those with:

  • Sustainable competitive advantages
  • An experienced, proven management team
  • Potential for significant and sustained revenue and earnings growth
  • High returns on capital
  • Market leadership and/or growing market share
  • Ability to capitalize on favorable longterm trends
  • Strong financial health and controls
  • Reasonable use of debt
  • Expanding operating margins
  • Substantial inside ownership
  • Attractive valuation

In short, our philosophy is to capture a company’s earnings growth at rational prices and let stockprice performance take care of itself. We also think extensive, fundamental due diligence is one of the best riskcontrol tools. As micro– and smallcap portfolio managers, we have a long history of following companies that go on to become the midcap and large/megacap companies of the future. Just as importantly, we have a strong sense of the type of companies that will never make it to the big leagues.


GRADUATION EFFECT
Another way to look at it: We wouldn’t be very good smallcap investors if all the smallcap companies in which we invested remained small caps. Ideally, some small companies in the other Wasatch strategies will eventually develop into larger companiesand thus outgrow the strategies’ mandates for them. Frequently, members of this select group may graduate from the smallcap space while the companies remain essentially unknown to investors. In addition, these companies often are neglected and poorly understood by Wall Street analysts and many of their buyside cohorts who focus on quartertoquarter results rather than a company’s three– to fiveyear outlook.

One of the interesting observations we’ve made over the yearsboth in the U.S. and internationallyis that highquality characteristics often persist in companies even after they begin to move beyond the smallcap realm. In addition, due to somewhat inefficient pricing but still reasonable liquidity, we’ve found there are frequently good investment opportunities in these companies even as they grow into mid caps and large caps. Wasatch’s Select strategies are designed to take advantage of these opportunities.


MID-CAP OPPORTUNITY SET
Wasatch Global Investors was founded in 1975 as a growthoriented investment boutique. We’ve spent over 40 years developing unique expertise in the small– and microcap space. As such, we believe Wasatch has a competitive advantage over other investment managers in a market segment that shows impressive growth potentialglobal mid capsbecause we’ve already covered the broadest and sometimes most difficult portions of the marketsmall and micro caps. While traditional managers may selectively “dip down” and be faced with the daunting number of midcap companies, we already have firsthand knowledge of many mid caps because we had been researching them as small caps for years.

We believe Wasatch is uniquely positioned to exploit opportunities in U.S. and international markets. The Wasatch Select strategies aim to capitalize on our expertise, and take advantage of beneficial inefficiencies within the largely overlooked midcap space.

Another reason we’re so excited about global mid caps is that the opportunity set is so expansivewhich makes it a good place to focus our investment research. As shown in Figure 1 below, among developed markets worldwide, there are almost 2,000 global mid caps ranging from $3 billion to $30 billion in market capitalization.

By comparison, there are almost 5,000 small caps above $300 million and less than $3 billion in market capitalization. However, we believe many of the small caps are unproven and/or are of lower quality. On the other end of the spectrum, there are only slightly more than 300 large/mega caps above $30 billion. These companies typically have what we consider to be inferior growth prospects relative to smaller companies and are more efficiently priced on worldwide stock exchanges.

Other attractive features of many global mid caps are:

  • Proven business models and management teams
  • Companies in the “executing on a plan” phase, which tends to be a lowerrisk phase because business models and management teams have already been tested
  • Great corporate cultures
  • Exposure to diverse companies, industries, sectors and countries around the world
  • Headroom for ongoing, robust sales growth
  • Healthy returns on assets (ROAs)
  • Strong free cash flows
  • Somewhat inefficient equity pricing with significant opportunities to create alpha
  • Reasonable volatility in stocks
  • Ability to combine lesscorrelated holdings to produce attractive risk/reward characteristics
  • Good diversification is achievable with a concentrated portfolio of highconviction names

In short, we believe the global midcap space is replete with great companies possessing precisely the characteristics we continually seek out. Moreover, great global mid caps often find a desirable balance between the maturity of largecap companies and the growth trajectories of smallercap companies. We believe many great midcap prospects are being overlooked by the broader investing world, presenting a rare and promising market opportunity for Wasatch to utilize its sound investment practices and years of institutional knowledge to find them for our Select strategies.


WHAT IS SELECT?
The Wasatch Select strategies are designed to take advantage of inefficiencies and opportunities within the global equity markets, while maintaining the flexibility to invest in companies of any size. In short, the Wasatch Select strategies are allcap, but tend to be focused on mid caps, with the sweet spot generally below $30 billion. Companies within this sweet spot are often poorly understood by Wall Street analysts and underrepresented in portfolios with global large– or allcap mandates.

Normally, the Wasatch Select strategies will invest in no more than 40 to 50 stocks, while offering broad diversification among countries and sectors. Consistent with Wasatch’s investment philosophy, the Select strategies focus on excellent companiesmany of which Wasatch has followed since they were smallthat meet our exacting investment criteria and have positioned themselves for longterm growth. Having graduated from the smallcap space, many of these companies are now market leaders within their respective countries and industries, yet still have room to grow.

The Select strategies are constructed using Wasatch’s timetested, bottomup process which focuses primarily on the prospects of individual companies. We also take into account the countries and sectors in which they operate, and the prevailing macro environment. Wasatch portfolio managers seek to identify companies that can grow earnings a minimum of 10% to 15% per year for at least three to five years. The Wasatch Select approach is available via three primary strategies: Global Select, International Select and Emerging Markets Select.


OVERVIEW OF THE THREE WASATCH SELECT STRATEGIES
The Wasatch Global Select strategy seeks to provide longterm growth of capital through investments in what we consider the highestquality, longduration growth companies found in U.S., nonU.S. developed and emerging markets. The Global Select strategy seeks to leverage Wasatch’s comprehensive coverage of small companies in developed and emerging markets to invest in companies that we believe can continue to grow for many years to come.

Moreover, compared to the large/megacapdominated MSCI ACWI (All Country World Index), the Wasatch Global Select strategy had a twoyear beta as of June 30, 2019 of only 0.88. This is a welcome indication of more diversification and less risk than one might expect in a concentrated strategy of dynamic, growthoriented companies. For context, as of June 30, 2019, the MSCI ACWI had a weighted average market capitalization of $158.4 billionwhile the Wasatch strategy was at $15.1 billion.

For institutional investors who require no exposure to emerging markets, Wasatch also offers the Global SelectDeveloped strategy, which only includes developed markets.

The Wasatch International Select strategy seeks to provide longterm growth of capital through investments in what we deem the highestquality growth companies found in nonU.S. developed markets. The International Select strategy seeks to take advantage of Wasatch’s comprehensive coverage of small companies to invest in those with outstanding longterm potential.

The Wasatch Emerging Markets Selectstrategy similarly seeks longterm capital growth via investments in companies found throughout emerging markets that we see as the highest quality with the best prospects for longduration success. Important aspects include the strategy’s 30– to 50stock portfolio and its focus on risk management. We believe the Emerging Markets Select strategy can generate significant alpha while offering a differentiated portfolio of stocks that doesn’t focus on traditional emergingmarket investments such as cyclical and commodityoriented companies.

Wasatch seeks to invest primarily in emergingmarket companies benefiting from domestic demand. We seek to capitalize on the lack of correlation between emergingmarket countries to provide the strategy with potentially lessvolatile returns than passively managed portfolios. In addition, we seek to invest in companies with market capitalizations below those of companies typically covered by traditional emergingmarket managers.


WASATCH ADVANTAGE
A Wasatch cornerstone has always been the deep due diligence applied to each investment we make. To take full advantage of the inefficiencies and opportunities available in global markets, our analysts roll up their sleeves and travel frequently in order to gain a true understanding of the companies and their markets. Wasatch generates over 90% of its research internally, while also conducting extensive screening and utilizing a team approach to find highquality growth companies that haven’t been discovered or properly understood by most investors. Wasatch’s international team regularly travels the world to meet with company management teams, who sometimes mention just how rare it is for them to actually get a visit from an analyst.

Another key element of Wasatch’s approach is crossteam collaboration. For example, we don’t send one person to Japan or India to determine the best companies in that country. We send a team of members with different backgrounds in order to get a morerobust understanding of each company. This team gets together with analysts who’ve been trekking through other parts of the world, as well as with the U.S. team, to compare companies from around the globe to help select investments that appear to have the best potential.

Wasatch’s research team consists of 34 portfolio managers and analysts. Each team member is dedicated to the collaborative, handson research process the firm employs in managing its mutual funds and institutional separate accounts.


SUMMARY
Wasatch Global Investors is committed to finding the mostpromising companies in the world, wherever they may be. With a 40yearplus background as a smallcap oriented firm focused on highquality, longterm growth, as well as a longstanding commitment to deep, thoughtful, inhouse research, we believe Wasatch is uniquely positioned to find companies with solid fundamentals before they appear on the radar of the broader investing world.

To this end, Wasatch believes our Select strategies employ a promising approach for targeting new opportunities that arise from inefficiencies in today’s global equity markets. The Wasatch Global Select, International Select and Emerging Markets Select strategies may be appropriate for investors seeking core exposure to global markets or looking for a potentially highalpha complement to their existing investments.


RISKS AND DISCLOSURES
Investing in foreign securities, especially in emerging and frontier markets, entails special risks, such as currency fluctuations and political uncertainties, which are described in more detail in the prospectus. Investing in small and micro cap funds will be more volatile and loss of principal could be greater than investing in large cap or more diversified funds.

Diversification does not eliminate the risk of experiencing investment losses.

An investor should consider investment objectives, risks, charges, and expenses carefully before investing. To obtain a prospectus, containing this and other information, visit www.WasatchGlobal.com or call 800.551.1700. Please read it 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. Past performance is no guarantee of future results, and there is no guarantee that the market forecasts discussed will be realized.

ALPS Distributors, Inc. is not affiliated with Wasatch Global Investors.


DEFINITIONS
Alpha is a riskadjusted measure of the socalled “excess return” on an investment. It is a common measure of assessing an active manager’s performance as it is the return in excess of a benchmark index or “riskfree” investment. The difference between the fair and actually expected rates of return on a stock is called the stock’s alpha.

Beta is a quantitative measure of the volatility of a given stock relative to the overall market. A beta above one is more volatile than the overall market, while a beta below one is less volatile.

Correlation, in the financial world, is a statistical measure of how asset classes, securities, markets, or countries move in relation to each other.

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

The MSCI ACWI (All Country World Index) captures large and mid cap representation across 23 developedmarket and 26 emergingmarket countries. With 2,844 constituents, the index covers approximately 85% of the global investable equity opportunity set. You cannot invest in this or any index.

Source: MSCI. The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indexes. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties or originality, accuracy, completeness, timeliness, noninfringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages. (www.msci.com)

Operating margin equals operating income divided by revenues, expressed as a percentage.

Return on assets (ROA) measures a company’s profitability by showing how many dollars of earnings a company derives from each dollar of assets it controls.

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.