Fund name: Wasatch Heritage Value (WAHVX)

Objective: The fund seeks long-term capital growth, but will grudgingly accept equity income as long as it doesn’t get in the way. It invests primarily in mid- and large-cap companies and may hold 30% of its assets in foreign stocks. It might fairly be described as both "concentrated" and "global." "Holdings in the Heritage Value portfolio generally fall into one of four categories: Deep Value (very low valuation relative to history), Value Momentum (cheap valuation but growth potential identified), Fallen Angel (growth company with ... is a temporary setback), or Special Situations/Hidden Value (spin-offs, post bankruptcies, financial restructuring, etc.)."

Adviser: Wasatch has been around since 1975. It both advises the 18 Wasatch funds and manages money for high net worth individuals and institutions. Across the board, the strength of the company lies in its ability to invest profitably in smaller (micro- to mid-cap) companies. As of December 2008, the firm had $4.5 billion under management. That represents a drop of more than 50% in 18 months, though they’ve made up a lot of ground so far in 2009.

Manager: Brian Bythrow. Mr. Bythrow joined Wasatch in 2003, has been with this fund since inception and has co-managed Wasatch Micro Cap Value (WAMVX) since inception. Before working for Wasatch, he managed the now-liquidated 1^st Source Monogram Special Equity Fund. He’s an honors graduate of the U.S. Air Force Academy, served as a captain in the Air Force and earned the Meritorious Service Medal. Afterward, he earned an MBA from California State University – Sacramento.

Inception: August 30 2007.

Management’s Stake in the Fund: As of December 31, 2008, Mr. Bythrow had between $100,000 and $500,000 in Heritage Value which is substantially more than he’s chosen to invest in his microcap fund.

Minimum investment: $2,000 for regular accounts, $1,000 for IRAs, Coverdells and accounts with automatic investment plans.

Expense ratio: 0.95% after waivers, on assets of $3.5 million.

Comments: There have been a number of outstanding small-cap value managers who have proved that the discipline that allowed them to succeed with small cap stocks works equally well with larger-company stocks as well. One might point to Scott Satterwhite’s success at the five-star Artisan Small Cap Value (ARTVX) fund that led him to launch the five-star Artisan Midcap Value (ARTQX) fund, which begat the four-star, large-cap Artisan Opportunistic Value (ARTLX) fund. Mr. Bythrow would like to follow a similar path, and seems to have both the credentials and the support to do it.

Mr. Bythrow came to Wasatch after five years as the manager of 1^st Source Monogram Special Equity Fund. During his years at the helm, Special Equity returned 13.3% per year – almost 50% ahead of its peer group. Immediately upon joining Wasatch, he helped launch Wasatch Micro Cap Value, which is five-star rated by both Morningstar and Lipper. WAMVX’s five-year record puts it in the top 2% of all small cap value funds. $10,000 invested there at inception would have grown to $16,900 (as of 8/28/09) while its peers averaged $11,200. In other ways, Mr. Bythrow added about six times as much value as did the normal manager.

Wasatch is moving to diversify their product array by adding income, alternative strategy, international and large cap funds. Their traditional fund lineup has been consistently successful ("every Wasatch equity fund with a 10-year history continues to be well ahead of its benchmarks and in the top 20% of its Lipper peer group for the 10-year period ended 6/30/09," they report) and most of the newer funds have early records in the "solid" range.

They attribute part of their success to a corporate culture which balances collaborative effort with individual initiative. Their portfolio managers debate regularly and managers regularly evaluate one another’s funds, so that it’s harder for a manager to become obstinate about an idea (think "Washington Mutual" and "Oakmark Select") that’s clearly failing. There’s a group exercise entitled "a walk through the graveyard" in which they revisit their worst investments, looking for ways to avoid repeating their mistakes. At the same time, fund managers still take individual responsibility. Every fund manager is expected to be in the field, vetting companies for inclusion in the portfolio. (They describe themselves as being "the most bottom-up manager in the business... .") And every manager is individually responsible for selecting the stocks in his or her portfolio; that work is not done by committee.

The system seems to work, both in producing above-average returns but also in generating manager loyalty: Wasatch’s managers have been on-board for an average of 12 years each.

So, you’ve got a good guy and a good supporting structure. His approach to "value" assumes that earnings drive stock prices through two mechanisms: (1) earnings growth and (2) p/e multiple expansion. That is, if you find a battered but good company that’s just beginning to grow again, and do it before the investing crowd arrives, you have the prospect of making serious money.

Wasatch believes that it has the experience and discipline to find well-managed companies which are set to turn around: spun-off firms, companies emerging from bankruptcy, companies with new product lines hitting the market or simply firms that has never been so cheap before (and which might regress to the mean). Like Wasatch’s other "value" funds, the combination of "value" and "momentum" means that the fund won’t dwell in Morningstar’s "large value" style. (Neither Micro Cap Value nor Small Cap Value has ever resided in Morningstar’s "small value" box.) It’s likely to be somewhat growth-oriented, which is okay since that’s often a characteristic of higher quality stocks.

In the fund’s short life, the strategy has worked well: they’ve posted a loss since inception (-15.4%) but it’s far better than the performance of their benchmark (-24.2%) or peers.

Bottom line: Wasatch is clearly sensitive to the special circumstances of the moment. Company founder Sam Stewart reported in July that "we are far from being out of the woods . . . [and] we have used this rally to take some profits, continue rotating to higher quality companies, and a build little dry powder (cash) for future opportunities." That sensitivity to quality explains why, their new president reports, "our performance tends to be better than average during tough periods." While this isn’t going to be a conventional large-value fund, Mr. Bythrow’s considerable success in applying the formula to small companies should give potential investors some confidence in its prospects.