Q:  What's your investment philosophy?

A: We are buy and hold investors; we are not traders. We are looking for companies that can grow earnings in a consistent fashion over a long period of time through both good and bad economic environments.

Q: What kind of companies are you looking to invest in?

A: We focus on the competitive positioning of the business and compare the quality of the business to other companies in the same market. Many businesses can grow, but the key is to find companies that can sustain their growth and also maintain consistently high margins. In order to do that, a company must possess some sort of sustainable competitive advantage. It can be a product or a service or a competitive position that would be difficult to replicate. It could also be a company's culture or the management team that allows it to execute better than its competitors.

We focus on companies that will grow better than their markets and faster than the general economy. We think if we stick to those types of companies and pay reasonable prices, then stock performance will take care of itself.

Q:  What type of growth are you looking for?

A: We stick to what we are good at, which is sizing up long-term growth companies with a sustainable competitive advantage. We are looking for companies that can at least double their earnings over the next five-year period. Many of the top 10 holdings of our fund right now have been owned, at various weights, for almost 10 years.

Q:  How do you find ideas? How is your research process organized?

A: The entire process is bottom-up fundamentals investing. When we find a company in a good business, with the type of competitive advantage that gets us excited and with a management team that we like, and assuming the valuation is good, we put it in the portfolio. We spend less time thinking about our sector allocation or areas of the market that we want to or don't want to have exposure to. Instead, we focus on assembling a great collection of companies that can grow their earnings over the long term.

First, we do a lot of quantitative screening. Some of our proprietary screens make narrowing the universe of stocks easier. Basically, we look for attractive revenue growth rates, attractive track records of consistent and high operating margins, favorable trends in key operating metrics, and high returns on capital. High levels of return on capital and improving returns on capital are the key metrics for us. High returns on capital, especially in relation to a company's competitors, can be a great signal as to whether there's a real competitive advantage or not.

After we have identified companies through this process, we try to assess whether or not they are sustainable growth companies. We'll do background checks on management teams and read all the public filings that exist. We don't rely on Wall Street for earnings estimates. We build our own model of each company and we use that to assess the current and potential future valuation of the stock.

One of the things we do in the Core Growth Fund is we try to visit every single company we hold in the portfolio at least once a year. It's really the on site visits that allow us to pick up big insights into a company's culture or how the management team works together and what makes that company different.

Q:  How important is valuation in your strategy?

A: Just because a company is growing or is in an attractive market, doesn't necessarily mean that we can make money owning the stock. That's where our own internal valuation models come into play.

We look out three to five years on every single holding using our models. We estimate the company's future performance and identify the key drivers in the model to come up with our valuation. Basically, we make some very conservative estimates about what the earnings multiple will be in the future. And then, with a high degree of certainty, we want to determine what we think the earnings growth and earnings targets will be.

Q:  Who are the people that manage the portfolio?

A: This portfolio is managed by a team of Wasatch portfolio managers with Paul Lambert and me being the key decisionmakers. I've been on this portfolio since 1999 and Paul joined the team as a portfolio manager in 2003. We are just two of 20 portfolio managers at Wasatch. It's a very collaborative, teamwork-focused environment.

Paul and I determine the specific stocks and the position sizes that go into the portfolio. It's not uncommon for any Wasatch portfolio to have the majority of its holdings come from ideas generated outside of the immediate team by our research partners here at Wasatch. We are all out looking for attractive, interesting companies and each of us has a slightly different approach to investing. We work through each company together in order to get what we refer to as a thorough “multiple eyes“ perspective on that company.

Q:  Can you give us one or two historical examples of stocks that you have identified through your research process?

A: Our top holding right now is a company called Copart (CPRT). Copart is the country's largest provider of auction services for salvaged vehicles, provided primarily to the auto insurance industry. It's been probably 10 years that we have owned this stock.