What's in a name? A whole lot if you are a mutual fund. Most mutual funds try to come up with catchy names that instill confidence and stability. Junk-bond funds call themselves high yield, aggressive growth funds use names like Discovery, Frontier and Venture, while others hide behind the "government" moniker to imply safety.
There's even one junk-bond fund that doesn't use the term "junk" or "high yield" in its name - Keystone B-4. The point is that many funds disguise their risk with fancy names. After all, who would want to give their fund a risky sounding name?Sam Stewart, that's who. Stewart is the manager of Wasatch Aggressive Equity, one of the best-kept secrets on Wall Street. "We wanted people to understand that there is volatility involved in our style of investing, which is in small capitalization stocks. Maybe we are too honest for our own good, but that is how we do business," he says.
AGGRESSIVE SOUNDS BAD. A lot of people are turned off by the term "aggressive," and I suspect that is one reason why Wasatch Aggressive Equity, despite its impressive track record, hasn't attracted more assets. I can't think of any other reason why this fund isn't bigger than it is.
The fact that Stewart's fund is still small is good news for those of you who recognize a good deal when you see one. Too many small aggressive growth funds built their track records while they were tiny funds, only to struggle once they became too large. The fact is that nimble, low-asset funds are better suited to aggressive investing.
Since its inception in 1986, Salt Lake-based Wasatch Aggressive Equity (WAAEX) has done exceptionally well. It is up 123 percent vs. 46.7 percent for the S&P 500 during that period. The average aggressive growth fund in the Donoghue OnLine database was up 100.5 percent.
All this growth hasn't come at the expense of safety, either. WAAEX carries a Donoghue bear market SuperStar rating of three stars (out of a possible five) and has a beta of only 0.89, which makes it less volatile than the S&P 500.
DON'T OVERPAY. Most aggressive growth funds invest in rapidly growing companies. The drawback to rapidly growing companies is that they cost a lot of money. Most have sky-high price/earnings multiples and sell at high valuations. Stewart also seeks growth but instead wants "growth at a reasonable value." That means he avoids the Wall Street darlings like Wal-Mart, Microsoft and Intel.
This value discipline steers Stewart to companies that are growing at an average 15 percent annualized rate but are selling at small premiums to the S&P 500. Essentially, the fund ends up with a wealth of excellent companies that are growing but not at an astronomical pace and at a valuation level a fraction of its aggressive growth peer group.
LARGEST HOLDINGS for the fund are not household names. United Asset Management (mutual funds), U.S. Cellular (communications), Loewen Group (funeral homes), Washington Federal S&L (banking) and Medicine Shop (specialty retail) are the largest holdings.
You wouldn't recognize most of the other holdings, either. With a median market capitalization of $212 million for its stocks, Wasatch Aggressive Equity is more like a micro-cap stock fund than a small-cap stock fund. The commonly accepted definition of small-cap is under $1 billion, so WAAEX is certainly on the low end of the capitalization spectrum.
ARMY OF BROKERS. Stewart has managed to do one thing I could never do - find a useful function for stockbrokers. He has built a national network of regional stockbrokers who alert him to special situations and unique companies in their areas. That means Stewart is often one of the first to hear about new, exciting companies. Given the small size of his fund ($50 million in assets), Stewart can take meaningful positions in small companies that larger funds would have to ignore.
Wasatch Aggressive Equity is nearly as aggressive as its name implies. It isn't without risk, by any means, but it bears lower risk than you might think and it has managed the risk it does take extremely well. Over the past five years, Morningstar has given it a five-star risk-adjusted rating.
Don't let the name fool you and don't wait for the fund to become so large that it cannot duplicate its impressive track record.
By the way, Stewart, a former university professor, is as exceptional a person as he is a portfolio manager. That's a unique combination well worth your consideration.