When opportunity knocks, Karey Barker is usually ready to open the door.
"Our primary focus is on opportunity," Barker, lead manager of the US$65 million Wasatch Ultra Growth fund, said from her Salt Lake City office. "Computer screens are good at identifying companies that have grown rapidly in the past, but they're less good at identifying future growth companies."
She looks for companies that can increase earnings and revenues 25 percent a year or more, mostly among the health care and technology industries, which account for about 80 percent of the fund's assets.
Her focus on growth has paid off for fund investors. The fund returned 21.3 percent a year, on average, for the three years through Thursday, compared with 10.6 percent for its small-growth group and 6.6 percent for the Standard & Poor's 500-stock index, according to Morningstar Inc. It returned 45.9 percent in the 12 months ended Thursday, compared with a 0.6 percent gain for its group and a 6.5 percent drop in the S&P 500.
To choose the 50 or so stocks in the fund, Barker, 33, and co-manager Ajay Krishnan, 32, troll for growth mostly among US companies with market capitalizations from US$200 million to US$5 billion.
The managers' primary search method is to seek out trends, and the stocks that will benefit. "We're looking for growth drivers, like industry or demographic trends, that will provide big opportunities over the next five years," Barker said. "After we identify themes, we look for companies that can benefit from them."
Current health care themes include genomics, drug delivery systems and novel therapeutics, among others. Technology themes include the need for high-speed data transmission and the pervasiveness of electronics in everyday life.
The research centers on one question, Barker said: "How big can the company become, and how fast can we get there?" Their goal is a fivefold increase in revenues or market capitalization in five years. The managers, and three analysts, spend most of their time assessing the probability that a company can achieve its profit forecasts. "It's critical to be out there, evaluating the quality of management and financial controls," Barker said. "There are a lot of companies that try to benefit from current trends," so the challenge is to figure out whether a particular company will be able to execute its plans.
They visit companies, evaluating business models and product lines as well as talking to suppliers, competitors and customers. "We're trying to validate what management tells us," she said, "by looking for third-party verification."
When they find companies with a good opportunity but a low chance of success, they might make small investments of one-quarter of 1 percent of the fund's assets in several of them.
For companies that the managers think are likely to continue growing steadily at 20 or 25 percent a year, they are cautious about valuation, preferring to pay multiples of price-to-earnings that are less than the company's growth rate.
They are willing to pay premiums for companies with big opportunities and a high likelihood of success. Such companies generally command 5 or 6 percent of the fund's assets. Unprofitable companies account for about 10 percent of assets. Barker sells shares when she believes prices can no longer rise 25 percent a year for three years or when she loses confidence in an investing theme or in company management.
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