Small Companies Mean the World to Him

This article originally appeared in the August/September 2012 issue of MorningstarAdvisor magazine. To subscribe, please call 1-800-384-4000. 

Not many people can say they’ve been working in the mutual fund industry since age 16—but Robert Gardiner can.

Gardiner began working at Wasatch Funds in 1981, joining his friend Eric Huefner at the firm while the two were high school students in Salt Lake City, Utah. Wasatch was still relatively new at the time, having been founded in the mid-1970s by University of Utah finance professor Sam Stewart. Gardiner and Huefner lived in the same neighborhood as Stewart, and the families were slightly acquainted. Stewart hired the teens to do administrative and back-office tasks after school and during summers.

In the era before personal computers, Gardiner and Huefner manually entered trades into accounting ledgers. The Wasatch offices had no computer terminals. When the market closed, the teens would go downstairs to a brokerage that had an office in the same building and use the brokerage’s terminal to get end-of-day quotes.

“We affectionately called ourselves the support team,” Gardiner says. “It was a really fun high school job. We had a great time.”

Thirty years later, the two longtime friends are again working together, although now they are running a brand-new mutual fund firm, Grandeur Peak Global Advisors. Gardiner launched Grandeur Peak in July 2011 after a long, successful career at Wasatch. After stints as a math teacher and at Campbell’s, Huefner returned to Wasatch in 2006. He is now Grandeur Peak’s president, chief operating officer, and chief compliance officer.

At Grandeur Peak, Gardiner aims to continue the same disciplined, bottom-up approach that worked so well for him at Wasatch. The firm launched two funds in October, Grandeur Peak Global Opportunities GPGOX, a world-stock fund, and Grandeur Peak International Opportunities GPIOX, which is in the foreign small/mid-growth category. Gardiner runs a small-growth investment style for both funds.

Morningstar does not yet cover Grandeur Peak, largely because the company is so new. But Morningstar analyst Bill Rocco followed Gardiner’s work at Wasatch for several years.

“Robert has been a leader in the micro-cap area,” Rocco says. “At Wasatch, they had a lot of success in domestic growth and then taking that abroad. He liked having the whole world as his universe and being able to buy the best growth companies. Some of these were faster growers, and some grew at steadier rates, and some of their funds paid a lot of attention to emerging markets. They go wherever, based on quality growth.”

Growing Up With Wasatch
That high school job at Wasatch paved the way for Gardiner to become an accomplished fund manager. After high school, he went on a Mormon mission in France and graduated from the University of Utah with degrees in physics and mathematics. He returned to Wasatch in 1986 as a full-time analyst and worked alongside Stewart and portfolio manager Jeff Cardon, now CEO of Wasatch Advisors.

“That kind of turned into being a partner, then I became a principal in the firm, and part of the executive committee, on the board of directors,” Gardiner says.

Gardiner ran mostly micro- and small-cap strategies at Wasatch. His record was stellar as manager of Wasatch Micro Cap WMICX, Wasatch Micro Cap Value WAMVX, Wasatch Small Cap Value WMCVX, and Wasatch Global Opportunities WAGOX—all funds that were regularly among the top performers in their categories.

Even as he was rising through the ranks, however, Gardiner knew that what he really wanted to do was to start his own firm. He had discussed that possibility with Stewart, Cardon, and the rest of the management team for years, and by 2008, he finally felt ready to make his move. He sold his Wasatch shares and prepared to set off on his own.

Then, Lehman Brothers went bankrupt and the market tanked. Gardiner changed his mind, deciding it was the wrong time to set sail. He says that his motivation for staying was driven more by loyalty to the firm that had given him his start than by concerns about launching his own fund in a poor market.

Blake Walker, the lead manager on the Wasatch International Opportunities Fund WAIOX, approached Gardiner and offered to step down a notch and let Gardiner run the fund while he served as analyst. Gardiner declined, but the message hit home.

“With Lehman hitting and Blake coming to me, I knew it was a bad time to leave Wasatch. I wanted to help my friends get back on track, and I knew I wanted to get back on the front lines,” he says.

Gardiner had been developing an interest in global funds, which allow the manager to invest anywhere in the world. Later in 2008, he and Walker launched Wasatch Global Opportunities. The fund has been a success, earning 5 stars from Morningstar.

Three years later, Gardiner and Wasatch did part ways. Walker came with him. Gardiner says that he remains close friends with his former colleagues and that his departure was amicable. In fact, Stewart’s son Spencer is one of Grandeur Peak’s analysts.

The Company Touch
The loyalty that Gardiner exhibited toward Wasatch is consistent with character traits that his current investors have observed.

Jonathan Satovsky, of New York-based Satovsky Asset Management, appreciates Gardiner’s “out of the limelight” style. Satovsky, who had been a Wasatch investor previously, has his moderate and aggressive clients in the Grandeur Peak Global Opportunities.

“He’s there in Salt Lake City, just keeping his head down and finding great companies,” Satovsky says. “It’s really hard to find a great small- or micro-cap manager who can find undiscovered companies and take a privateequity kind of approach, and bring a longerterm thought process to the experience.”

The approach that Satovsky refers to consists of rigorous fundamental screening, as well as phone calls and visits with companies to determine if they would be good additions.

“There’s nothing super proprietary,” Gardiner says, showing the humility his investors and colleagues recognize. The methodologies are essentially the same as those he used at Wasatch.

He and Walker, along with Grandeur Peak’s analysts, run screens called DuPont analyses. The team looks at fundamental metrics including return on assets, rising estimates, and insider buying. They also scan for fallen angels—stocks that were once top performers but may have missed quarterly estimates and now look poised for a turnaround.

The universe they are choosing from spans the globe. Gardiner is adamant that too many investors overlook opportunities because they are hemmed in by rigid style mandates. In the past, he had become frustrated by investment universes limited to either the United States or international—one or the other, but not both.

“I view a domestic fund as sort of like setting up a Texas fund. And then the international fund is like investing in 49 states, excluding California,” he says.

The screening process for international and domestic stocks is extremely methodical. Harkening back to Gardiner’s own youth working in the back room at Wasatch, his daughter has the job of running each week’s batch of stock screens. The screens are broken out into regions. For example, one week they will cover particular U.S. states and foreign countries, with that pattern rotating over the course of a year. Screens also cover industries on a rotating basis, so nothing gets overlooked.

“Names pop up off the screen,” Gardiner says. “If we think it looks interesting, it goes on a hot list for one of the analysts or one of the PMs to look at. If it’s super interesting, it goes on a ‘red hot’ list.”

The next step is what Gardiner and Walker dub the “company touch”—a phone call or visit with a company’s management. “We’ll go visit the company, see it, hear the story, see if we trust the guy,” Gardiner says.

Small, Growing, and Strong
Grandeur Peak has trademarked a phrase to describe what it’s looking for in a company: Best In Class Growth. Gardiner says that the approach is simple. “We’re trying to find a really good small company that has good corporate governance, that has head room to grow, has a sustainable competitive advantage, and a good business model. We’re trying to find those companies before everybody else finds them.”

Walker cites a German online transaction processor, Wirecard, as an example of a company that meets his and Gardiner’s criteria. The electronic-payment space is an area in which Wasatch enjoyed success with investments such as Concord, which was eventually acquired by First Data.

These days, Grandeur Peak is looking to opportunities in the online payment arena. The fund managers see plenty of potential there, as more retailers around the world bring their wares online. Gardiner likes the way Wirecard expanded throughout Europe and is now making inroads in Asia. Another similar holding is Japan-based GMO Payment Gateway.

In addition to Gardiner and Walker, the Grandeur Peak team includes four analysts. One, Amy Sunderland, is based in Hong Kong. She, like several other members of the team, is a Wasatch veteran. Gardiner says that having an analyst on the ground in Asia has helped the firm do a more rigorous analysis of emerging markets companies.

Gardiner maintains that many U.S. investors have a skewed view of overseas risk and believe foreign investing to be a swamp of corruption and lacking in transparency. On the contrary, he sees examples of better governance than is sometimes found stateside and a degree of transparency that is common in U.S.-listed names.

Advisor Dominick Vetrana, of Chicago’s Fountainhead Financial, appreciates the opportunities that Gardiner and Walker are uncovering. “I use it for micro-cap opportunistic investing, globally. Right now, it’s probably my main small-cap exposure.”

Vetrana says that Gardiner brings more to the process than his stock-analysis skills. “Robert has a passion for the business,” he says. “If you get him talking about an individual stock, he lights up. That’s something you can’t replicate.”