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WASATCH INVESTMENT PROCESS

Our Process Wasatch Advisors has a unique philosophy about investing and we follow a strict discipline in order to achieve our fund objectives. This section goes into detail about our investment process as well as what makes our fund management style our own. > What we look for when we invest > Our sell discipline Our 5-step investment process Wasatch practices a disciplined and unique process that utilizes extraordinarily thorough due diligence, cross-team collaboration, and individual experience (Wasatch portfolio manager industry tenure averages 16+ years) to find better investments. Cross-team collaboration provides unique insights and perspectives to our in-depth analysis, while the final decision on each investment remains with the fund's lead portfolio manager(s). Continue through this page to learn more, or click to see specific information about: In this section: Multiple EyesSM Step 1: Proprietary screens Step 2: Study company fundamentals Step 3: Study the broader competitive landscape Step 4: Meet with management Step 5: Value the company Multiple EyesSM Integral to our investment service is multiple eyes cross-team collaboration. Our multiple eyes service helps portfolio teams pool their knowledge, talent and experience and share it with other teams. Cross-team collaboration is used between teams with different investment styles (growth and value), sizes (smaller cap and larger cap) and scopes (domestic and international). Before making a formal recommendation, the lead analyst will discuss an investment idea with other analysts (note: all portfolio managers are also first and foremost analysts) who are known to have insight relevant to the specific investment being considered. Each investment idea is then vetted

across the entire research team. This takes place via a formal investment recommendation shared with every analyst in the firm. Analysts that may have specific insight into the company, industry, or country will provide thoughts back to the lead analyst for consideration. The multiple eyes cross-team collaboration also includes a periodic portfolio review called High-End Consulting. During this review, a portfolio manager asks other portfolio managers to subjectively dissect the portfolioproviding thoughts and feedback on investment strategy, portfolio composition and specific holdings. High-end consulting helps portfolio managers look at their portfolio through fresh eyes to make sure that they are not "missing the forest for the trees." With so much investment exploration going on across the firm it is not unusual for analysts to come across interesting companies that dont fit the specific style of their own portfolio. Our multiple eyes service makes it easy to pass ideas on to other analysts for appropriate consideration. JEFF CARDON, CFA, CEO of Wasatch Advisors, Portfolio Manager of Small Cap Growth Fund Wasatch believes that having many people scrutinize our portfolio holdings leads to the best investment decisions. Thats why our portfolio managers and analysts rely on one another as sounding boards, looking for additional insights and fresh perspectives. We exchange information, challenge each others judgments and feel a shared sense of responsibility for every investment Wasatch makes. Because we view multiple eyes as an essential element of our process, we spend considerable time and effort thinking about ways to maintain and improve how we collaborate. We also incentivize this practice by tying a portion of every portfolio managers bonus to the overall performance of all Wasatch portfolios. Step 1: Proprietary screens We start researching companies by running our own proprietary financial screens across all sectors. Were looking for trends, consistency, and absolute numbers among a host of metrics that have proven to be good success predictors historically. We use these screens to narrow the investment universe and identify potentially interesting investments. Crossteam collaboration helps analysts and portfolio managers look for and interpret clues from the screens. Step 2: Study company fundamentals

As our screening reveals companies that appear to be attractive investments, we then go to the fundamentals, searching for information to help us better understand the companys history, vision, objectives, performance, culture, etc. This includes searching financial databases, reading financial reports, reviewing news articles and collaborating with other analysts who may have knowledge of the company. During this process, we particularly look for companies with a strong business model and a sustainable competitive advantage. Step 3: Study the broader competitive landscape We want to understand the company in its broader context. We search for clues in the industry and in the companys operating environment. We take the unconventional steps of contacting suppliers and customers to shed light on the company's relationships, products, and business plan. We study competitors to more fully understand the industry and the firms competitive advantage. We will even use the companys products or services ourselves when applicable. Our multiple eyes collaboration is at play throughout this process as others in the firm will almost certainly have relevant experience with the industry, competitors and geographies. Step 4: Meet with management The quality of a company's management team is critical to us. A brilliant business plan in the hands of mediocre management may fail. An average business plan in the hands of brilliant managers has a greater chance of success. We look for management teams comprised of smart, passionate and talented individuals with a history of success and skin in the game. They must possess detailed knowledge of their business, their company, and how they are going to win. Company visits allow us to appraise the essence of a company and its management team in the context of its own surroundings. We diligently scrutinize the business model, the competitive advantage, and the financials to understand just how completely the management team has thought through their plans. We are evaluating the management team while looking for yellow or red flags. If we feel the need to dig even deeper with unknown or less proven management teams, well perform background checks on management using fully disclosed and above board methodsas another way to ensure that we are placing our shareholders assets with worthy stewards. ROGER EDGLEY, CFA, Director of International Research, Portfolio Manager We are covering the world quite literally. All of the Wasatch analysts travel

extensively, getting out in the field to interview management teams and see company operations firsthand. Weve found this to be particularly important as many of the international companies we visit tell us that were one of the few investment firms that have visited them. We believe that meeting with a company on its home turf is one of the best ways to verify our investment thesis. Step 5: Value the company After finalizing our investment thesis, we are ready to value the company. We look out three to five years and make our own projections of where we realistically think the company will be at that time, often building our own proprietary financial models. Based on our three to five year projected revenue, earnings, cash flow, etc., we determine what we believe is a fair price range for the company in three to five years' time. We then calculate the expected return on an investment given its current price. Based on this expected return, we determine what position size to purchase. If the company is very interesting but we believe the stock does not offer an attractive return over the next three to five years due to its current inflated price, we will put it on our watch list. We then look to buy a position if the price temporarily drops at some future point (unless an unforeseen change in our investment thesis causes the drop). CHRIS BOWEN, Portfolio Manager, Heritage Growth Fund Unlike many investors, weve taken the path of trying to understand the fundamental drivers of a companys earnings over the next three to five years or more. Thats where we create our advantage. When you talk about whats really driven performance for Wasatch over the years, its getting those long-term stories right and holding onto them.

What we look for when we invest


An important part of our investment discipline is knowing what to look for as we scour the globe for great investment opportunities. In researching both growth and value stocks there are certain company characteristics that we have found to be good predictors in long-term success time after time. We dig deep to understand each investment across critical characteristics in both growth and value investing. In this section: Our growth investing objectives Our value investing objectives

Seeking out exceptional management

Growth Investing
We are looking for what we believe to be the Worlds Best Growth Companies (WBGC) These companies share the following characteristics: Qualitysolid business model with strong financials Exceptional Managementexperienced, passionate, proven management team, with skin in the game Sustainable Competitive Advantageprotection for their solid business model Room to Growclear opportunity for significant and sustained revenue and earnings growth Drilling a level deeper, we also look for the following traits in great growth companies: Potential for expanding operating margins High return on capital and assets Market leadership and/or growing market share Barriers to competitive entry Ability to capitalize on favorable long-term trends Substantial insider ownership Once we have found what we believe to be one of the Worlds Best Growth Companies, valuation is an important element of our investment decision. With our core belief that earnings growth drive stock prices, we expect to capture price appreciation comparable to earnings growth as long as the price/earnings multiple is reasonable at the time of purchase. As a rough rule of thumb we like the P/E to be around our projected earnings growth rate. If the valuation is higher than this we will put the company on our watch list and look for opportune times to purchase.

Value Investing
Wasatch value investments are stocks trading at a price below their intrinsic values due to one of the following situations: 1. Fallen Angel a great growth company that has hit a temporary setback, causing an appealing valuation relative to its long-term growth potential. We are looking for the same characteristics in these companies as outlined under our growth investing discipline. In fact,

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our growth team members are key contributors in helping us identify these companies. Hidden Gem a growing company that is undervalued because it has yet to be broadly discovered by Wall Street. Here again we are looking for the same characteristics as outlined under our growth investing discipline. These companies are likely to be held in both our value and growth portfolios. Value Momentum a more traditional value company, these stocks are trading at a very low value relative to their history. We purchase such companies once we can identify a clear catalyst for growth (my take: for improving valuation: consolidation; management change etc.; new product etc.). Hidden Value a quality firm with assets or earnings potential not fully reflected in their stock price. These are generally more complicated situations where we believe the market is challenged in understanding the true value. We invest in these companies when we anticipate that an event is likely to occur that will help illuminate the true value. Special Situation a recent spin-off, a post-bankruptcy firm or company currently undergoing financial restructuring. These too are often more complicated situations which some investors have trouble valuing. We will invest here when our 3-5 year projections for the firm show a compelling opportunity.

Seeking out exceptional management


One consistent element we look for across all of these different types of value stocks is exceptional management. This harkens back to our core belief that the companys business plan is only as good as its management team. In each of these value situations our investment success is dependent on the management team delivering on their business plan.

Our sell discipline


We sell a stock if our original company thesis changes. For example, the management team changes, new competitors enter the market; the company decides to move in a different direction, or other significant changes. If our core investment thesis is broken, we sell. We also sell, or trim, holdings as their valuation changes. If there is an unwarranted short-term increase in price we will trim back, and then look to buy back up when the price comes down.