Behind the scenes with Wasatch's "go-anywhere" fund

NEW YORK Fri Mar 15, 2013 12:09am EDT

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NEW YORK (Reuters) - The Wasatch World Innovators Fund can go anywhere in the world, and lately that has led managers of the $192 million portfolio to some high-profile companies, including Apple Inc and Herbalife Ltd.

The fund took the top 2013 U.S. Lipper Fund Award for the Global Multi-Cap Growth category in both the three- and five-year periods. Lipper is a unit of Thomson Reuters.

The fund returned an annualized 15.37 percent in the three-year period ended November 30, 2012, compared with 7.02 percent returned by the MSCI All Country World Investable Market Index. In the five-year period, the fund returned annualized gains of 3.98 percent, compared with a 0.73 percent loss by the index.

Josh Stewart, co-manager of the fund with his father, Sam Stewart - who founded Wasatch Advisors in 1975 - discusses the fund's investment strategy, what he likes and what keeps him up at night.

Q: What's the secret of the fund's success?

A: I think there is that special sauce of experience, perspective and managerial skill. I am working with my dad, who is in his 70s. He started Wasatch over 30 years ago, and he has a lot of experience. We believe in talented, active managers picking the right stocks and knowing when to buy and sell as well as finding good long-term investments.

Q: Is World Innovators a theme fund?

A: The fund has been around for over 10 years, and it was called Global Science and Tech Fund. But we changed it to World Innovators for a few reasons: We wanted to have a wide-open canvas where we could go anywhere in the world. We want companies to be competing, winning and vetting their products.

We are interested in companies like Italy's medical diagnostics group DiaSorin, which is off the radar for a lot of investors, yet it is a good midsize, solid company with a fantastic management team.

We want to find companies with products that have been vetted everywhere in the world, and they need to show that they provide value. For example, there are some products that can slip through the cracks in the United States that have been vetted by the FDA. A medical device that has been used only in the U.S. and has not been approved in the UK or EU with great healthcare systems, might not be delivering the value it promised.

We own a lot of Apple. Apple products have been vetted by consumers around the world. They have been found to be the best, easiest-to-use, most value-for-your-money products.

So it is not just to be able to pick any company anywhere in the world but also a company that has proven itself.

Q: In your top-10 holdings, you have Herbalife Ltd, which has become a battleground for Wall Street investors who support and oppose the firm's strategy. In your opinion, has this company vetted and proven itself?

A: We own a good chunk of this diet supplement company; we believe that people are using the product.

When you get a short-seller like William Ackman saying "Nobody uses this stuff," then the answer to him is: "You live in a super-expensive neighborhood in Connecticut. And guess what, maybe your neighbors are not using this stuff. You don't live in the same reality as the average consumer in this world."

The historical problem with a tier-selling, multi-level marketing scheme is that sometimes there is inventory that gets hidden. So the distributor - the individual person selling to their friends - would buy a bunch of boxes, but he is not selling them through.

Part of Herbalife's model is that they have these shake clubs where everyday friends will come together and drink their shakes and provide moral support on this diet they are doing. It's this daily consumption model that is unique. Less is getting stuck in the inventory channel because people are using it every day. The whole inventory system is moving smoothly in Herbalife.

Q: You also own Visa Inc and Mastercard Inc. Are you betting on consumer growth?

A: One of our core philosophies is market share gains. While being vetted around the world is one key point, another key point is that we like a company that can take market share.

Visa and Mastercard are playing the idea of a cashless society. The trend for us is that cash is old, outdated technology and that there is a better way.

Visa and Mastercard are riding this wave of taking market share from cash. We are trying to play the consumer game, we own it because of the moving into electronics versus cash. We see them as a platform and they offer trust. If there is any fraud on the consumer side or on the merchant side, everyone is protected.

Q: What keeps you up at night?

A: Herbalife was keeping me up at night. Because my dad was very confident with it, he was buying into the weakness, and we have been vindicated. Our biggest detractor last quarter to our performance was Herbalife. This quarter it is going to be our biggest contributor, I am almost positive.

He bought a lot more when it was in the 20s, then he sold some when it was in the 40s. The stock recently traded at $40.80 per share. It is a long-term investment for us, but we do play around when there are valuation differences and when we see inefficiencies. When the market overreacts to things we react.

Q: What would you change in the management of the fund? What do you struggle with?

A: Sometimes we pass on some of the real revolutionary and innovative companies because it is hard to see where you get the return on investment.

The way we have dealt with that problem is that we have tended to make some smaller-weight investments in companies such as Tesla Motors, an electric cars and components manufacturer. They re-thought the entire model of how should a car be powered, but you look at their stock price, which has risen around 12 percent in the past year, and it is harder to say where will that wind up.

(Reporting by Manuela Badawy; Editing by Lauren Young and Steve Orlofsky)

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