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Wasatch Small Cap Value Holds Its Head Up

Nellie S. Huang, Senior Associate Editor, Kiplinger's Personal Finance

Small-company stocks have trailed large-company stocks for much of the bull market. But you wouldn't know that by looking at Wasatch Small Cap Value. The fund's 18.8% annualized gain since the stock market rally began in March 2009 beats the return of the Russell 2000 index, which tracks small-company stocks, as well as Standard & Poor's 500-stock index, a proxy for large-company shares.


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The past 12 months have been particularly volatile for small-company stocks, in part because the period began with a 26.9% pullback in the Russell 2000 in late 2018. But Small Cap Value held up better than the index during the downdraft, and in 2019, it rebounded more strongly, too. In short, although the fund's one-year loss of 2.7% is disappointing on an absolute basis, it beat the 8.9% dent in the Russell 2000. "We're a good house in a bad neighborhood," says manager Jim Larkins. (Returns are through September 30.)

Larkins looks for growing companies that trade at value prices. "This is a growth-ier value fund," he says. The portfolio's 50-odd stocks generally fall into one of three buckets: undiscovered gems, or companies operating largely under the radar; fallen angels, or firms suffering a temporary setback; and what Larkins calls quality value, or cheap stocks in steadier, slower-growing firms. The mix of fast-growers and sturdier companies has helped the fund deliver above-average returns with below-average volatility.

One of the fund's hidden gems is LGI Homes (symbol, LGIH), an up-and-coming homebuilder that targets first-time buyers. The stock has climbed more than 75% over the past year. And then there's Lithia Motors (LAD). Larkins first bought shares in 2017. The company, which buys up failing car dealers and turns them around, stumbled in 2018 after a slew of acquisitions. Low interest rates have helped business this year, however, and shares have risen 64%.

But the fund's high-quality names give it stability. Arbor Realty Trust (ABR), a real estate finance company, has returned 25% over the past 12 months and sports an 8.9% yield. "We like income payers in our portfolio to offset our fallen-angel approach--that's the messier part of the portfolio," says Larkins.

Fidelity's zero-commission rollout included an announcement that the firm will automatically direct investor cash into its highest-yielding sweep accounts.


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