67,252 Stocks To Top 300: Portfolio Manager Details Stock Selection Process For High Return Asset Management

Wall Street Transcript

67 WALL STREET, New York - July 25, 2012 - The Wall Street Transcript has just published its International Investing Report offering a timely review of the sector to serious investors and industry executives. This special feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: International Small Cap Investing - "Fallen Angels" Small Caps Strategy

Companies include: Zumiez, Inc. (ZUMZ), W.W. Grainger, Inc. (GWW), Nintendo (NTDOY), and many others.

In the following excerpt from the International Investing Report, an experienced portfolio manager discusses his methodology:

Mr. Walker: Let me start from the top and work down. If I look on Bloomberg, there are 67,252 public companies traded in the world. If you weed out the securities that don't trade and the countries that are too unstable, we have an investable universe of about 33,000 companies.

Of the 33,000, roughly 30,000 are small- and micro-cap. This is still a lot, and people often ask us, "How can you as a six-person team cover the globe?" To be fair, we have a number of research interns and associates, so we're actually more than six, but it is a lot of work. We always liked the Warren Buffett quote "you don't have to be smarter, just more disciplined."

We take those 30,000 companies, and we have a 52-week screening schedule. Each week we run a geography screen, a sector screen and proprietary screens, for example, a screen that looks for insider buying plus a turn in the ROA. Through this screening we are looking at every company in our universe at least twice a year, and the most interesting companies will be popping up more than that. We have a really nice repeatable process that allows us to cull what we think is the cream from the investable universe. We have been running such screens for years, and our experience allows us to quickly look at these company snapshots and determine which are worthy of further analysis.

We then begin due diligence on these firms. We get our arms around their business model, incorporate information we already know about the industry, competitors, etc., and set up an introductory call with the firm's management. This is the beginning of "peeling the onion."

Our team also travels extensively to visit companies on their home turf. You get a different feel for the management team and for the business by seeing it firsthand. When we go to a country, take Sweden for example, we will rescreen the entire country to make sure we have the list of most interesting companies. In Sweden we will send two analysts to spend a week together and visit 25 companies. From these 25 visits our analysts will come back with six to eight companies that they are really excited about.

The list might get narrowed to three to five to buy right now based on valuation. You start adding this up all around the world and it's easy to see how you could come up with 300 great investments. This is still just 1% of our universe. We believe we can build a portfolio of really exciting names that are the best of the best, but which also provide nice diversification to reduce the portfolio's volatility.

At Wasatch we had as many as 350 names in the portfolio. We have been trimming the list as we continue to peel the onion. Our plan is to lower the names in the portfolio further over time, but our primary commitment is simply to look for great investments and weight them in the portfolio as we think is appropriate given the risk and opportunity that each presents.

TWST: So this is an ongoing process, but is there a macro overlay pointing you to particular countries and particular industries that you find most attractive right now?

For more from this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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