It is rare that we issue a Launch Alert for a seventeen year old fund. Then again, it is rare that we find a 17 year old fund as remarkable as Seven Canyons World Innovators (WAGTX / WIGTX). World Innovators was launched on December 19, 2000 as Wasatch World Innovators. The fund, with its sibling Strategic Income Fund (WASIX), was rechristened with the new Seven Canyons identity on September 10, 2018.
Seven Canyons Advisors was formed in September 2017 with Wasatch founder Sam Stewart, his sons and their colleagues. He characterized the move as “the opportunity to have a new adventure in my life after the 42 years I spent at Wasatch.” The firm began life with six professionals and about $200 million in assets under management of which about $159 million is in World Innovators.
The portfolio has two distinctive characteristics. First, the managers target companies that they call “World Innovators”. These are companies that sell innovative products and services dramatically superior to legacy offerings. These rapid market share gains enable revenue growth through the economic cycle, so even in an industry downturn or a broader recession they report sales growth That means there’s room both for traditional tech & telecom names (for example, video game publisher Take Two Interactive) and firms in lower-tech areas (e.g., The New York Times, one of the fund’s top 5 holdings). In explaining the latter, manager Joshua Stewart notes, “NYT has been the gold standard for old media companies adapting to the digital age – increasing the quality of reporting, adding video content and podcasts and delivering news the way people want it in the 21st century.” There’s a consistent line of research that shows that an innovative culture creates an enduring structural advantage for such firms.
Second, the portfolio is typically global and oriented toward smaller capitalization firms. Both are part of its Wasatch heritage, where the senior Mr. Stewart created an unparalleled focus on such firms. While they are not limited to small firms (Sony, Disney and Nintendo are three of the top four holdings), there’s a consistent bias in that direction.
In all cases, firms need to exhibit above average growth potential, a market leading position, strong management teams, strong financials and “rational” prices.
The fund’s charms are substantial and varied:
The fund has earned a Five Star ranking from Morningstar, which is grounded in its long-term risk-return profile
The fund has earned a Silver rating from Morningstar’s machine-learning algorithms, which seek to identify the funds with the greatest prospects for future success
Over the past decade, it has the second highest returns (13.5% APR) and highest Sharpe ratio (0.82) of any fund in Lipper’s global small-mid cap category. Over the same period, it has the second highest returns in its Morningstar world small/mid stock category.
Over the past 3, 5, 10 and 15 year measurement periods, Morningstar assigns it “above average” to “high” return scores with “average” to “below average” risk scores.
The management team is experienced and stable, with the senior Mr. Stewart having managed it for a decade and the younger Mr. Steward coming up on his seventh year co-managing it.
The fund’s sole drawback is its expense ratio, which Morningstar categorizes as “high” and which Lipper places as second-highest among global small-mid cap funds. The managers might reasonably respond that this is an expensive niche and that they’ve more than earned back their fees, but the concern is likely to remain pressing in many potential investors’ minds.
The fund’s Investor share class carries a $2000 minimum initial investment and expenses of 1.75%. The Institutional class is $100,000 and 1.55%, respectively. The firm’s website is attractive, but content is growing at a modest rate.
