Wasatch Investment Process

8/12/2019 Wasatch Investment Process

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WASATCH INVESTMENT PROCESS

Our Process

Wasatch Advisors has a unique philosophy about investing and we follow astrict discipline in order to achieve our fund objectives. This section goes into

detail about our investment process as well as what makes our fundmanagement style our own.

> What we look for when we invest

> Our sell discipline

Our 5-step investment process

Wasatch practices a disciplined and unique process that utilizes

extraordinarily thorough due diligence, cross-team collaboration, andindividual experience (Wasatch portfolio manager industry tenure averages

16+ years) to find better investments. Cross-team collaboration providesunique insights and perspectives to our in-depth analysis, while the final

decision on each investment remains with the fund's lead portfoliomanager(s). Continue through this page to learn more, or click to seespecific information about:

In this section:

Multiple EyesSM

Step 1: Proprietary screensStep 2: Study company fundamentalsStep 3: Study the broader competitive landscape

Step 4: Meet with managementStep 5: Value the company

Multiple EyesSM

Integral to our investment service is multiple eyescross-team collaboration.Ourmultiple eyesservice helps portfolio teams pool their knowledge, talent

and experience and share it with other teams. Cross-team collaboration is

used between teams with different investment styles (growth and value),sizes (smaller cap and larger cap) and scopes (domestic and international).

Before making a formal recommendation, the lead analyst will discuss an

investment idea with other analysts (note: all portfolio managers are alsofirst and foremost analysts) who are known to have insight relevant to the

specific investment being considered. Each investment idea is then vetted
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across the entire research team. This takes place via a formal investment

recommendation shared with every analyst in the firm. Analysts that mayhave specific insight into the company, industry, or country will provide

thoughts back to the lead analyst for consideration.

The multiple eyescross-team collaboration also includes a periodic portfolioreview called High-End Consulting. During this review, a portfolio manager

asks other portfolio managers to subjectively dissect the portfolioprovidingthoughts and feedback on investment strategy, portfolio composition and

specific holdings. High-end consulting helps portfolio managers look at theirportfolio through fresh eyes to make sure that they are not "missing the

forest for the trees."

With so much investment exploration going on across the firm it is not

unusual for analysts to come across interesting companies that dont fit thespecific style of their own portfolio. Our multiple eyesservice makes it easyto pass ideas on to other analysts for appropriate consideration.

JEFF CARDON, CFA, CEO of Wasatch Advisors, Portfolio Manager of Small

Cap Growth FundWasatch believes that having many people scrutinize our portfolio holdings

leads to the best investment decisions. Thats why our portfolio managersand analysts rely on one another as sounding boards, looking for additional

insights and fresh perspectives. We exchange information, challenge eachothers judgments and feel a shared sense of responsibility for every

investment Wasatch makes. Because we view multiple eyesas an essential

element of our process, we spend considerable time and effort thinkingabout ways to maintain and improve how we collaborate. We alsoincentivize this practice by tying a portion of every portfolio managers

bonus to the overall performance of all Wasatch portfolios.

Step 1: Proprietary screens

We start researching companies by running our own proprietary financial

screens across all sectors. Were looking for trends, consistency, andabsolute numbers among a host of metrics that have proven to be good

success predictors historically. We use these screens to narrow theinvestment universe and identify potentially interesting investments. Cross-

team collaboration helps analysts and portfolio managers look for andinterpret clues from the screens.

Step 2: Study company fundamentals


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As our screening reveals companies that appear to be attractive

investments, we then go to the fundamentals, searching for information tohelp us better understand the companys history, vision, objectives,

performance, culture, etc. This includes searching financial databases,reading financial reports, reviewing news articles and collaborating with

other analysts who may have knowledge of the company. During thisprocess, we particularly look for companies with a strong business model

and a sustainable competitive advantage.

Step 3: Study the broader competitive landscape

We want to understand the company in its broader context. We search for

clues in the industry and in the companys operating environment. We takethe unconventional steps of contacting suppliers and customers to shed light

on the company's relationships, products, and business plan. We studycompetitors to more fully understand the industry and the firms competitiveadvantage. We will even use the companys products or services ourselveswhen applicable. Our multiple eyescollaboration is at play throughout this

process as others in the firm will almost certainly have relevant experiencewith the industry, competitors and geographies.

Step 4: Meet with management

The quality of a company's management team is critical to us. A brilliantbusiness plan in the hands of mediocre management may fail. An average

business plan in the hands of brilliant managers has a greater chance

of success. We look for management teams comprised of smart, passionateand talented individuals with a history of success and skin in the game.

They must possess detailed knowledge of their business, their company, andhow they are going to win. Company visits allow us to appraise the essenceof a company and its management team in the context of its own

surroundings. We diligently scrutinize the business model, the competitiveadvantage, and the financials to understand just how completely the

management team has thought through their plans. We are evaluating themanagement team while looking for yellow or red flags.

If we feel the need to dig even deeper with unknown or less provenmanagement teams, well perform background checks on management

using fully disclosed and above board methodsas another way to ensurethat we are placing our shareholders assets with worthy stewards.

ROGER EDGLEY, CFA, Director of International Research, Portfolio Manager

We are covering the world quite literally. All of the Wasatch analysts travel


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extensively, getting out in the field to interview management teams and see

company operations firsthand. Weve found this to be particularly importantas many of the international companies we visit tell us that were one of the

few investment firms that have visited them. We believe that meeting with acompany on its home turf is one of the best ways to verify our investment

thesis.

Step 5: Value the company

After finalizing our investment thesis, we are ready to value the company.

We look out three to five years and make our own projections of where werealistically think the company will be at that time, often building our own

proprietary financial models. Based on our three to five year projectedrevenue, earnings, cash flow, etc., we determine what we believe is a fair

price range for the company in three to five years' time. We then calculatethe expected return on an investment given its current price. Based on thisexpected return, we determine what position size to purchase. If thecompany is very interesting but we believe the stock does not offer an

attractive return over the next three to five years due to its current inflatedprice, we will put it on our watch list. We then look to buy a position if the

price temporarily drops at some future point (unless an unforeseen changein our investment thesis causes the drop).

CHRIS BOWEN, Portfolio Manager, Heritage Growth FundUnlike many investors, weve taken the path of trying to understand the

fundamental drivers of a companys earnings over the nextthree to

five years or more. Thats where we create our advantage. When you talkabout whats really driven performance for Wasatch over the years, itsgetting those long-term stories right and holding onto them.

What we look for when we invest

An important part of our investment discipline is knowing what to look for as

we scour the globe for great investment opportunities. In researching bothgrowth and value stocks there are certain company characteristics that

we have found to be good predictors in long-term success time after time.We dig deep to understand each investment across critical characteristics in

both growth and value investing.

In this section:

Our growth investing objectivesOur value investing objectives
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Seeking out exceptional management

Growth Investing

We are looking for what we believe to be theWorlds Best GrowthCompanies (WBGC)These companies share the following characteristics:

Qualitysolid business model with strong financialsExceptional Managementexperienced, passionate, proven

management team, with skin in the gameSustainable Competitive Advantageprotection for their solid business

model

Room to Growclear opportunity for significant and sustained revenueand earnings growth

Drilling a level deeper, we also look for the following traits in great growthcompanies:

Potential for expanding operating margins

High return on capital and assetsMarket leadership and/or growing market share

Barriers to competitive entryAbility to capitalize on favorable long-term trends

Substantial insider ownership

Once we have found what we believe to be one of the Worlds Best Growth

Companies, valuation is an important element of our investment decision.With our core belief that earnings growth drive stock prices, we expect tocapture price appreciation comparable to earnings growth as long as the

price/earnings multiple is reasonable at the time of purchase. As a rough

rule of thumb we like the P/E to be around our projected earnings growthrate. If the valuation is higher than this we will put the company on our

watch list and look for opportune times to purchase.

Value Investing

Wasatch value investments are stocks trading at a price below their intrinsicvalues due to one of the following situations:

1. Fallen Angela great growth company that has hit a temporarysetback, causing an appealing valuation relative to its long-term

growth potential. We are looking for the same characteristics in thesecompanies as outlined under our growth investing discipline. In fact,
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our growth team members are key contributors in helping us identify

these companies.2. Hidden Gema growing company that is undervalued because it

has yet to be broadly discovered by Wall Street. Here again we arelooking for the same characteristics as outlined under our growth

investing discipline. These companies are likely to be held in both ourvalue and growth portfolios.

3. Value Momentuma more traditional value company, thesestocks are trading at a very low value relative to their history. Wepurchase such companies once we can identify a clear catalyst forgrowth (my take: for improving valuation: consolidation; management

change etc.; new product etc.).

4. Hidden Valuea quality firm with assets or earnings potential notfully reflected in their stock price. These are generally morecomplicated situations where we believe the market is challenged in

understanding the true value. We invest in these companies when we

anticipate that an event is likely to occur that will help illuminate thetrue value.

5. Special Situationa recent spin-off, a post-bankruptcy firm orcompany currently undergoing financial restructuring. These too are

often more complicated situations which some investors have troublevaluing. We will invest here when our 3-5 year projections for the firm

show a compelling opportunity.

Seeking out exceptional management

One consistent element we look for across all of these different types ofvalue stocks is exceptional management. This harkens back to our core

belief that the companys business plan is only as good as its managementteam. In each of these value situations our investment success is

dependent on the management team delivering on their business plan.

Our sell discipline

We sell a stock if our original company thesis changes. For example, the

management team changes, new competitors enter the market; thecompany decides to move in a different direction, or other significant

changes. If our core investment thesis is broken, we sell.

We also sell, or trim, holdings as their valuation changes. If there is an

unwarranted short-term increase in price we will trim back, and then look tobuy back up when the price comes down.


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Documents

Wasatch Investment Process