DECEMBER 7, 2020

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By Debbie Carlson

The past 10 years in equity markets have been the story of large-cap stocks: As the Amazon.coms and Alphabets of the world have outperformed smaller companies, they have also dominated investors’ attention. But Ken Korngiebel sees plenty of reasons to fo-cus on the smallest of companies, which have been largely overlooked.

“No one has to care about the microcap universe,” says Korngiebel, lead portfolio manager of the $1 billion Wasatch Micro Cap fund (ticker: WMICX). “People get in-terested because it’s an active strategy that is showing some value-add, as opposed to [one] the world is clamoring to get in.”

Yet the past decade has been powered by growth, and investors who ignore tiny companies could be missing out. Micro Cap demonstrates that: The five-star, Morning-star bronze medalist fund has beaten the Russell Microcap Index by a wide margin on a one-, three-, five-, and 10-year basis. Its average annual return for the past five years has been about 25%, and roughly 18% for the past decade.

The fund does have a higher-than-average fee of 1.66%, but Korngiebel says that’s be-

F U N D P R O F I L E Talking With Ken Korngiebel Lead Portfolio Manager, Wasatch Micro Cap

Finding Quality in Tiny Stocks

Photograph by KIM RAFF

The past 10 years in equity markets have beenthe story of large-cap stocks: As the Ama-zons and Alphabets of the world have out-performed smaller companies, they havealso dominated investors’ attention. But KenKorngiebel sees plenty of reasons to focus onthe smallest of companies that have been

largely overlooked.“No one has to care about the microcap universe,”

says Korngiebel, lead portfolio manager for the $1 billion Wasatch Micro Cap fund (ticker: WMICX). “People get interested because it’s an active strategy that is showing some value-add, as opposed to [one] the world is clam-oring to get in.”

Yet the past decade has been powered by growth, andinvestors who ignore tiny companies could be missing out. Wasatch Micro Cap demonstrates that: The five-star Morningstar bronze-medalist fund has beaten the Rus-sell Microcap Index by a wide margin on a one-, three-, five-, and 10-year basis. Its average annual return for the past five years has been about 25%, and roughly 18% for the past decade.

The fund does have a higher-than-average fee of 1.66%,but Korngiebel says that’s because capacity is limited; as a firm, Wasatch is quick to close funds. Also, researching very small companies is more intensive than digging into larger-cap firms, where information is more readily avail-able. Last year, the Salt Lake City–based Korngiebel, 55, said he flew more than 140,000 miles, mostly domesti-cally, as part of the research process.

Korngiebel has spent his career in small-cap funds.Before joining Wasatch in 2015, and becoming the head of Micro Cap in 2017, he worked at Columbia Management—now known as Columbia Threadneedle Investments—and Montibus Capital Management.

The fund defines microcap as firms with a market

By DEBBIE CARLSON

F U N D P R O F I L E Talking With Ken Korngiebel Lead Portfolio Manager, Wasatch Micro Cap

Finding Quality in Tiny Stocks

Photograph by KIM RAFF

The past 10 years in equity markets have beenthe story of large-cap stocks: As the Ama-zons and Alphabets of the world have out-performed smaller companies, they havealso dominated investors’ attention. But KenKorngiebel sees plenty of reasons to focus onthe smallest of companies that have been

largely overlooked.“No one has to care about the microcap universe,”

says Korngiebel, lead portfolio manager for the $1 billion Wasatch Micro Cap fund (ticker: WMICX). “People get interested because it’s an active strategy that is showing some value-add, as opposed to [one] the world is clam-oring to get in.”

Yet the past decade has been powered by growth, andinvestors who ignore tiny companies could be missing out. Wasatch Micro Cap demonstrates that: The five-star Morningstar bronze-medalist fund has beaten the Rus-sell Microcap Index by a wide margin on a one-, three-, five-, and 10-year basis. Its average annual return for the past five years has been about 25%, and roughly 18% for the past decade.

The fund does have a higher-than-average fee of 1.66%,but Korngiebel says that’s because capacity is limited; as a firm, Wasatch is quick to close funds. Also, researching very small companies is more intensive than digging into larger-cap firms, where information is more readily avail-able. Last year, the Salt Lake City–based Korngiebel, 55, said he flew more than 140,000 miles, mostly domesti-cally, as part of the research process.

Korngiebel has spent his career in small-cap funds.Before joining Wasatch in 2015, and becoming the head of Micro Cap in 2017, he worked at Columbia Management—now known as Columbia Threadneedle Investments—and Montibus Capital Management.

The fund defines microcap as firms with a market

By DEBBIE CARLSON

F U N D P R O F I L E Talking With Ken Korngiebel Lead Portfolio Manager, Wasatch Micro Cap

Finding Quality in Tiny Stocks

Photograph by KIM RAFF

The past 10 years in equity markets have beenthe story of large-cap stocks: As the Ama-zons and Alphabets of the world have out-performed smaller companies, they havealso dominated investors’ attention. But KenKorngiebel sees plenty of reasons to focus onthe smallest of companies that have been

largely overlooked.“No one has to care about the microcap universe,”

says Korngiebel, lead portfolio manager for the $1 billion Wasatch Micro Cap fund (ticker: WMICX). “People get interested because it’s an active strategy that is showing some value-add, as opposed to [one] the world is clam-oring to get in.”

Yet the past decade has been powered by growth, andinvestors who ignore tiny companies could be missing out. Wasatch Micro Cap demonstrates that: The five-star Morningstar bronze-medalist fund has beaten the Rus-sell Microcap Index by a wide margin on a one-, three-, five-, and 10-year basis. Its average annual return for the past five years has been about 25%, and roughly 18% for the past decade.

The fund does have a higher-than-average fee of 1.66%,but Korngiebel says that’s because capacity is limited; as a firm, Wasatch is quick to close funds. Also, researching very small companies is more intensive than digging into larger-cap firms, where information is more readily avail-able. Last year, the Salt Lake City–based Korngiebel, 55, said he flew more than 140,000 miles, mostly domesti-cally, as part of the research process.

Korngiebel has spent his career in small-cap funds.Before joining Wasatch in 2015, and becoming the head of Micro Cap in 2017, he worked at Columbia Management—now known as Columbia Threadneedle Investments—and Montibus Capital Management.

The fund defines microcap as firms with a market

By DEBBIE CARLSON

F U N D P R O F I L E Talking With Ken Korngiebel Lead Portfolio Manager, Wasatch Micro Cap

Finding Quality in Tiny Stocks

Photograph by KIM RAFF

The past 10 years in equity markets have beenthe story of large-cap stocks: As the Ama-zons and Alphabets of the world have out-performed smaller companies, they havealso dominated investors’ attention. But KenKorngiebel sees plenty of reasons to focus onthe smallest of companies that have been

largely overlooked.“No one has to care about the microcap universe,”

says Korngiebel, lead portfolio manager for the $1 billion Wasatch Micro Cap fund (ticker: WMICX). “People get interested because it’s an active strategy that is showing some value-add, as opposed to [one] the world is clam-oring to get in.”

Yet the past decade has been powered by growth, andinvestors who ignore tiny companies could be missing out. Wasatch Micro Cap demonstrates that: The five-star Morningstar bronze-medalist fund has beaten the Rus-sell Microcap Index by a wide margin on a one-, three-, five-, and 10-year basis. Its average annual return for the past five years has been about 25%, and roughly 18% for the past decade.

The fund does have a higher-than-average fee of 1.66%,but Korngiebel says that’s because capacity is limited; as a firm, Wasatch is quick to close funds. Also, researching very small companies is more intensive than digging into larger-cap firms, where information is more readily avail-able. Last year, the Salt Lake City–based Korngiebel, 55, said he flew more than 140,000 miles, mostly domesti-cally, as part of the research process.

Korngiebel has spent his career in small-cap funds.Before joining Wasatch in 2015, and becoming the head of Micro Cap in 2017, he worked at Columbia Management—now known as Columbia Threadneedle Investments—and Montibus Capital Management.

The fund defines microcap as firms with a market

By DEBBIE CARLSON

cause capacity is limited—as a firm, Wasatch is quick to close funds. Also, researching very small companies is more intensive than digging into larger-cap firms, where infor-mation is more readily available. Last year, the Salt Lake City-based Korngiebel, 55, says, he flew more than 140,000 miles, mostly do-mestically, as part of the research process. He spent his career in small-cap funds. Be-fore joining Wasatch in 2015 and becoming Micro Cap’s lead portfolio manager in 2017, he worked at Columbia Management—now known as Columbia Thread needle Invest-ments—and Montibus Capital Management.

The fund defines microcaps as firms with a market value of less than $1.5 billion, or smaller than the largest company in the Rus-sell Microcap index. Micro Cap doesn’t au-tomatically sell holdings if they surpass the $1.5 billion threshold, which is why the fund has a higher-weighted average market cap and median market cap than its benchmark, Korngiebel says.

“We are really investing with the idea of what is the company going to look like over the next five years,” he says.

Korngiebel divides the portfolio into two buckets: disruptive companies with a good chance of doubling in size in about three years, and firms with predictable growth rates that may double in about five years.

The faster-growing firms “have great eco-nomic engines,” showing high profitability or a margin structure that will grow when scaled up as costs fall, he says. These firms are in big markets with innovative products and services where they can grab market share, such as apparel and home products.

The more stable companies will still show attractive growth rates in the mid-single to low-double digits, he says. They tend to be in less cyclical markets, such as health care, and if they operate in a fragmented indus-try, it means less competition and potential growth through mergers and acquisitions.

Korngiebel looks for quality companies whose market cap may increase enough to eventually be owned broadly across the

Wasatch platform. He likes firms with little debt, a solid management team, and strong company culture. He has to be convinced the management team can execute the strat-egy, and he gets a feel for company culture through site visits. (Those are currently curtailed because of the coronavirus, but he maintains communication with companies he already knows.)

Micro Cap’s No. 1 holding, Kornit Digital (KRNT), reflects this investment philoso-phy. The fund first purchased the stock in mid-2017 when the company’s market value was around $500 million—it’s now $3.6 bil-lion. Kornit economically uses digital screen printers to make custom, short-run designs for both apparel and home déor with 24-hour turnaround times, and Korngiebel saw the company was poised to take advantage of the personalization trend. The company benefits from the growth in e-commerce—Amazon (AMZN) is a customer—but it is also making inroads into high fashion, as Versace also uses Kornit’s technology.

Korngiebel first became interested in

No. 3 holding Purple Innovation (PRPL), maker of the Purple mattress, when CEO Joe Megibow joined in 2018 after building e-commerce businesses at traditional retail-ers. Purple sells both directly to consumers and in retail stores. That brand recognition of being in stores benefited its e-commerce business when the wholesale business shut down because of pandemic-induced lock-downs. Korngiebel bought Purple stock in March at a market cap around $650 mil-lion—it is now $1.6 billion. Purple operates in the premium segment, so there is less price competition, he says, and the founders have expertise in material science, so they can branch out to non-mattress goods such as pillows and bedding.

An example of companies in Micro Cap’s second bucket of stable but less rapid growth rates is Transcat (TRNS), which does testing calibration for life-sciences compa-nies and other highly regulated industries. Korngiebel says he likes that CEO Lee Ru-dow has industry experience building and selling a company to a larger competitor. Transcat recently installed technology sys-tems to automate some testing features and increase productivity, a pathway to expand-ing margins, he says. First bought in 2018 at a market cap of $150 million, the company is now at $240 million, “and it’s not hard to see it doubling again,” he adds.

Looking ahead to 2021, Korngiebel says he doesn’t predict where the economy will go, but he believes that markets are in an in-between phase when it comes to the pan-demic: beyond the initial trauma, but not yet past it, even as hopes for a vaccine rise. He has started nibbling on growth companies in the hardest-hit industries, such as airlines and hotels. Some portfolio shake-ups may be coming, too.

“There are some opportunities to recycle some of the companies that have been big winners, or the larger market caps in the portfolio with companies that are squarely microcap as well as those that may have some recovery aspect,” he says.

Average Annual Total Returns For Periods Ended September 30, 2020

1 Year 3 Years 5 Years 10 Years

Wasatch Micro Cap Fund (WMICX) 43.47% 25.10% 23.23% 17.05%

Russell Micro Cap Index 4.44% -0.09% 6.72% 9.50%

Data show past performance, which is not indicative of future performance. Current performance may be lower or higher than the data quoted. To obtain the most recent month-end performance data available, please visit wasatchglobal.com. The Advisor may absorb certain Fund expenses, without which total return would have been lower. Investment returns and principal value will fluctuate and shares, when redeemed, may be worth more or less than their original cost. Performance for the Institutional Class prior to 1/31/2020 is based on the performance of the Investor Class. Wasatch Funds will deduct a 2.00% redemption proceeds fee on Fund shares held 60 days or less. Performance data does not reflect the deduction of fees or taxes, which if reflected, would reduce the performance quoted. For more complete information including charges, risks and expenses, read the prospectus carefully. The Total Annual Fund Operating Expenses for the Investor Class shares of the Micro Cap Fund are 1.66%.

The Russell Microcap Index is an unmanaged total return index of the smallest 1,000 securities in the small cap Russell 2000 Index and the next smallest 1,000 companies based on a ranking of U.S. equities by market capitalization.

All rights in the Russell Indexes vest in the relevant London Stock Exchange Group plc (collectively, the “LSE Group”), which owns these indexes. Russell® is a trademark(s) of the relevant LSE Group company and is used by any other LSE Group company under license. These indexes are calculated by or on behalf of FTSE International Limited or its affiliate, agent or partner. The LSE Group does not accept any liability whatsoever to any person arising out of (a) the use of, reliance on or any error in the Index or (b) investment in or operation of the Fund or Separate Account. The LSE Group makes no claim, prediction, warranty or representation either as to the results to be obtained from the Fund or Separate Account or the suitability of these indexes for the purpose to which they are being put by Wasatch Global Investors. You cannot invest directly in any index. The Morningstar Rating for funds, or ‘star rating,’ is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed end funds, and separate accounts) with at least a 3-year history. Exchange–traded funds and open ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product’s monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its 3-, 5-, and 10-year (if applicable) Morningstar Rating metrics. The weights are 100% 3-year rating for 36-59 months of total returns, 60% 5-year rating / 40% 3-year rating for 60-119 months of total returns, and 50% 10-year rating / 30% 5-year rating / 20% 3-year rating for 120 or more months of total returns. While the 10-year overall rating formula seems to give the most weight to the 10-year period, the most recent 3–year period actually has the greatest impact because it is included in all 3 rating periods. As of November 30, 2020, the Fund’s Investor Class was rated 5, 5 and 5 stars against 578, 507 and 383 funds in the Small Cap Growth Category for the for the 3-, 5- and 10-year periods, respectively. The Fund’s other share class may have different performance characteristics. Past performance is no guarantee of future results. © 2020 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.

References to individual companies should not be construed as recommendations to buy or sell shares in those companies. Current and future Fund holdings are subject to risk and change at any time. RISKS Investing in small cap or micro cap funds will be more volatile and loss of principal could be greater than investing in large cap or more diversified funds. Investing in foreign securities, especially in emerging markets, entails special risks, such as currency fluctuations and political uncertainties, which are described in more detail in the

prospectus. The Fund’s investment objective is long-term growth of capital. An investment in the Fund involves risk, including loss of principle. An investor should consider investment objectives, risks, charges and expenses carefully before investing. To obtain a prospectus, containing this and other information, visit wasatchglobal.com or call 800.551.1700. Please read the prospectus carefully before investing. Wasatch Global Investors, Wasatch Funds and ALPS Distributors, Inc. are independent of Barrons and have no editorial control over the content, subject matter and timing of this article. Wasatch Funds are distributed by ALPS Distributors, Inc. (ADI). ADI is not affiliated with Wasatch Global Investors or Barrons. WAS005327 Exp: 1/31/2021