Fund name: Wasatch Strategic Income (WASIX)

Objective: Maximize current income by investing in income-producing securities. This may include both equities and debt, foreign and domestic. Growth, of capital and income, is a secondary objective. As of March 31, 2006, about 15% of the portfolio is invested in foreign stocks. The fund's annual yield has ranged between 5% and 6% in recent quarters, higher than the yield for Vanguard's Total Bond Market index fund.

Manager: The fund is advised by a six-person team, nominally led by the firm’s founder, Samuel S. Stewart, Jr.

Opening date: February 1, 2006

Minimum investment: $2000 for regular accounts, $1000 for IRAs.

Expense ratio: 0.95% after fee waivers on a tiny $10 million asset base. The waiver is in effect until the end of January 2007, though it may be renewed.

Comments: "Strategic income" funds are one reason that folks find Morningstar so useful. Investors were often baffled by the wealth of funds that called themselves "dividend growth" (one dozen), "blue chip" (two dozen), "equity income" (three dozen) or "growth and income" (four dozen). Especially when dividend growth funds invested in stocks that paid no dividends and blue chip funds bought small cap stocks which might, one day, become blue chips. Morningstar’s oft-criticized style-boxes and standardized peer groups tried to help cut through the marketing clutter.

Which might be useful here. There are, as it turns out, over two dozen funds that claim the title "strategic income." With that many entrants, you’d imagine that such funds might have something in common. Silly you – these things range from ultra-short bonds to high-risk junk bonds and stock-bond hybrids.

Wasatch’s version of "strategic income" focuses on income-producing securities. Generally speaking, the portfolio is divided between three components: blue chips whose dividends exceed 3%, dividend growth stocks which have smaller current dividends but prospects for steady increases, and high-yield value stocks. Right now, almost all of the high-yield stocks are REITs. While the three components are equally-weighted at the moment, Eric Bergeson – a Vice President at Wasatch – argues that won’t always be the case. The division between the three components is driven by the team’s judgment of value, rather than by preset portfolio weightings. Bergeson also stresses that the "strategic income" title gives the fund flexibility to invest in bonds and other income-producing investments beyond the stock market.

The short-term case for income-producing stocks is that they’re generally favored in slower markets. The longer-term argument is driven by the life experience of the firm’s founder, who is also the fund’s lead manager. Mr. Stewart is old enough to envision life in retirement, though he doesn’t currently plan on it. His judgment is that other baby-boomers moving into retirement will shift their portfolios toward income-oriented investments. Since the S&P500’s yield and long-term rates are both low, yield-oriented stocks will be well-positioned to benefit from the change.

Whatever the merits of the underlying strategy, the fund is attractive for its pedigree. The folks at Wasatch run a number of very strong stock funds and WASIX draws, in part, on the research already conducted for those funds. It’s team-managed by experienced senior people and Wasatch has a great record for responsible management. They’re one of the few company’s willing to arrange early, hard closings for successful funds (in the case of Micro-cap Value, the fund was open to new investors for a single day and then closed even to its existing investors). They’ve got very low manager turnover and have been good about lowering fees as assets rise.

The biggest caution flag is Wasatch’s modest success in translating their outstanding small-growth investing model (centered on their list of America’s Best Growth Companies) into success with larger domestic stocks. Their other larger-cap fund, Heritage Growth, also attempts to leverage the research done for the other funds. Unlike WASIX, but like the small-cap funds, Heritage Growth has a distinctly growth-y portfolio. Nevertheless, it has been only a modest success in its first two years of existence. Given the shape of its portfolio, it seemed fair to compare it to a mid-cap growth index fund. Heritage Growth has trailed TIAA-CREF’s Mid-Cap Growth Index fund in five of the past eight quarters (including 2006 2Q, through 6/28).

Bottom Line: Given Wasatch’s scant track record investing in larger companies, this is clearly not a slam-dunk. Nevertheless, a sensible, conservative strategy, unique portfolio, and first-rate management make this a serious option for conservative stock investors.