12.15.2011
By Terry Flanagan

Growth and Value Merge

Portfolio manager searches for “fallen angels” and “orphaned IPOs,” that don’t fit any style box.

Many say that mutual fund investing norms typically shun “style drifting,” and favor managers that fit industry “style boxes,” as set by firms such as Morningstar. Yet, with volatility rampant in the markets, flexibility and a “go-anywhere” model has become more critical today.

In some cases, portfolio managers find that the nature of their investments, simply change.

“Most of my colleagues try to own the highest quality small cap growth companies in the market,” said Jim Larkins, portfolio manager at Wasatch Advisors, the investment manager to Wasatch Funds, mutual fund complex, and institutional separate managed accounts.

“Given the volatile nature of small cap companies and the significant number of companies that stumble, our research team regularly presents a tremendous opportunity set for me as a value investor. There is a market inefficiency that exists when a growth stock becomes a value stock and we can exploit it.”

Many long-term investors have recently shunned the current volatile environment in lieu of the belief that long-term holdings will win out over short-term activity in the markets. Larkins, who is described as a “value investor surrounded by growth investors,” is on the hunt to look for companies hurt by short-term volatility to persevere years down the road.

“I try to find great companies that hit a rough patch or a bump in the road. They become ‘fallen angels’ for one reason or another,” said Larkins who manages the Small Cap Value Fund with $181 million under management. The Wasatch Small Cap Value Fund invests primarily in small companies with market capitalizations of less than $2.5 billion.

“Fallen angels” describe companies that have experienced a recent downturn in price or value. For Larkins, these are highly undervalued, and have “significant potential for price appreciation.”
Yet, value stocks that have fallen from their highs and “escaped the attention of the crowd” are not the only attractive investments for Larkins.

“I look for opportunities via initial public offerings (IPOs) that dodge the radar screens of most investors after news caused by initial hype, which occurs within the first couple of quarters or even the first couple of years after going public,” said Larkins.

“We look for good companies at a time when other investors are not paying attention, but the Street moves on to the next deal at the first sign of trouble… some really good companies get abandoned by the crowd.”

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