Robert Gardiner and Blake Walker ran some of the best-performing mutual funds in the nation during their years at Wasatch Advisors. Gardiner was lead manager of Wasatch Micro Cap Fund from July 1995 through 2006, producing a cumulative 1,138 percent return, versus 228 percent for the average small-cap growth fund. Walker became lead manager of the Wasatch International Opportunities Fund in 2005 and co-manager with Gardiner of the Wasatch Global Opportunities Fund in 2008, which they ran through June 2011 -- both funds with top results.
Needless to say, there was much excitement when Gardiner and Walker left to start their own fund shop last July: Grandeur Peak Global Advisors in Salt Lake City. With them came a number of former Wasatch employees, including Spencer Stewart, a former analyst and son of Wasatch founder Sam Stewart. Last October they launched Grandeur Peak Global Opportunities and Grandeur Peak International Opportunities. (Both have 1.75 percent expense ratios, net of fee waivers.) The shop has $200 million, a shadow of Wasatch’s $10.2 billion at the end of 2011. An edited transcript of Lewis Braham's conversation with Grandeur chief investment officer Walker follows.
Q. How does Grandeur Peak differ from Wasatch?
A. We wanted the benefit of having a nimble asset base again. We’re also approaching investing from a purely global perspective as far as industry analysts go, without any division between the domestic and international side. Otherwise, we’re basically following the core Wasatch philosophy of buying growth companies that can dominate an industry, are taking market share, are self-funded, have clean balance sheets and have high returns on capital and assets.
We find those by systematic diligent screening. There are 66,776 companies listed on my Bloomberg terminal. If you exclude those that don’t trade and those in countries you’ll never go to, you’re left with about 30,000. Each week we’re looking at a given country or industry -- going through the entire universe, trying to find those with good numbers. On an initial screen we may say, "Show us every company with a return on capital in excess of 15 percent." Our hurdle rate on most things is 15 percent.
Q. You invest in three kinds of companies -- best-in-class growth companies (or BICs), fallen angels and stalwarts. Can you give me an example of a best-in-class growth company?
A. Wirecard in Germany is an electronic payment processor. If I buy something online and you’re the retailer, you’re responsible and have all the liability for the transaction. You want to mitigate any liability by going with a good processor.
Wirecard has its own bank, so it captures more of the processing fee, and it has great technology because it’s been dealing with cross-border transactions in Europe forever. They have great risk systems, good technology and they’re getting scale. It’s been growing its revenues over the last five years at a 40 percent annual rate. It trades at 22 times earnings, so it’s a little expensive.
Q. What's another best-in-class company that isn't expensive?
A. Hy-Lok is a Korean manufacturer of precision fittings and valves for the petrochemical and ship-building industries. It trades at 9.8 times trailing earnings. Its five-year sales growth rate is 16 percent and the operating income has grown 17 percent on a 10-year basis.
At the end of the day, when you look at our portfolio versus its benchmark, we always have two to three times the operating margins and a third of the debt-to-capital ratio, so our balance sheets are much cleaner. And we’re paying roughly the same valuation as the benchmark. Our companies are growing faster and we’re not paying anything more for that growth.
Q. That's because you tend to invest in smaller, less-well-known companies?
A. Small caps are a big part of our story. Institutional analysts don’t cover many small, foreign stocks. That’s a huge advantage to us. If you look at the investable universe, 90 percent of the investable universe is between $100 million and a $1 billion in market cap.
Q. How do you do check out 30,000 companies? Do you travel a lot?
A. I just spent a week in Taiwan, a week in Japan and a week in Canada. In the last six months we’ve been to Brazil, South Africa, all over Europe, all over North America, all over Asia. You’ve got to get out and knock on a lot of doors.
Q. Does it concern you that during a panic, small caps tend to get hit hard because they’re illiquid?
A. It’s a bit of a worry. Being as valuation-sensitive as we are helps in downturns. If you’re truly a long-term investor, you like downturns. It gives us a buying opportunity in super high-quality stuff that we wouldn’t otherwise get. And there’s a silver lining in downturns for our companies. Because they are high quality, they are gaining market share from weaker companies in downturns.
Q. How much do you have in emerging markets in the Global Opportunities Fund?
A. About 35 percent of our companies are domiciled or have significant exposure to emerging markets.
Q. Isn’t that high for a global fund?
A. Developed versus emerging is a misleading factor. The lines are blurring. All our natural resource companies listed in Canada and the U.K. are all selling into China and their growth is 100 percent contingent on whether China imports more or less copper, for instance. The beauty of global investing is you can go anywhere to get exposure to a country.
For instance, we like the trend toward more inspection of electronic devices. Miniaturization is happening in a big way in electronics. You can’t eyeball the devices anymore to see if the electrical connections and soldering are good. You need lasers or high-precision camera. There’s a Korean company called Koh Young Technology, another in Taiwan called Test Research and a third in Germany called Viscom that do this kind of work. We have exposure to all three. But most of their factories are going up in China. Koh Young and Test Research are battling it out there for the business of major electronics manufacturers like Foxconn.
Q. Wasatch is famous for closing funds to new investors before they get too big. Do you anticipate doing the same thing?
A. We’re going to close our entire firm at $1.5 billion to $2 billion. Our goal is not to be big. We just want to be really good. We’ll likely close Global Opportunities to new investors around $400 million; it's $150 million now.