Business Professor Makes a Name for Himself

The next time somebody asks you to name a business professor who has actually succeeded as an investor, you can mention Samuel Stewart.

Stewart runs the Wasatch Advisors group of funds in Salt Lake City and is one of the relatively few finance professors to make a name for himself as a mutual fund manager.

His Wasatch Aggressive Equity Fund, the company’s flagship, has beaten the broad stock market over the last five years and enjoys an above-average, four-star rating from Morningstar Inc. of Chicago. The November issue of Worth magazine calls it the best small-cap growth fund around.

What’s interesting about Stewart isn’t just that he has successfully practiced what he preaches. Also notable is that his active stock-picking management style runs counter to the passive, indexing approach that has been popular within academic circles for years.

“Academics aren’t very heavy into security analysis,” Stewart said. He feels there are pockets of inefficiency despite the so-called efficient-markets theory, a belief that it’s tough to beat the market because prices already reflect the universal body of knowledge and expectations about a particular stock.

“Some question why anyone would want to waste time on stock research,” he said.

But research stocks he does, and he follows an earnings-oriented growth approach, in contrast to the bargain-hunting value style that’s more popular in the academic world.

But Stewart also focuses on smaller companies, which scholars agree are less-efficiently priced (because fewer professional analysts follow them) and thus more likely to yield bargains.

Stewart is unusual in other ways too. For starters, he’s one of the few fund managers who actually spent some time working on the other side of the fence--as a regulator for the Securities and Exchange Commission early in his career.

And because his shareholder base in and around Utah includes quite a few Mormons, Stewart runs Aggressive Equity and three other Wasatch funds with an eye on avoiding “sinful” stocks and bonds.

“We’ll generally stay away from certain types of stocks such as tobacco, alcohol and gambling companies because we know enough shareholders wouldn’t like them,” said Stewart, a Mormon himself.

His current favorite holdings include United Asset Management, a mutual fund firm; Loewen Group, a funeral home chain; and furniture retailer Heilig-Meyers. Stewart likes to buy profitable, growing companies when they’re warm rather than hot.

“We follow a growth style but we’re not high-turnover or momentum players,” he said.

Still, the fund is an aggressive- growth product, which means it will take investors on plenty of roller-coaster rides. As a case in point, the fund has suffered double-digit quarterly losses on three separate occasions since the crash of 1987.

The fund is “definitely not for granny,” said Morningstar analyst A. Jason Windawi, who points to its high concentration in volatile health-care and technology stocks.

On the other hand, Aggressive Equity has outperformed the Standard & Poor’s 500 index by an average of seven percentage points annually over the last five years, he notes.

“One of the fund’s advantages is managerial consistency,” Windawi said.

The fact that Wasatch is headquartered in Salt Lake City, hardly a mutual fund capital, is another unusual aspect. But Stewart feels he’s well-served staying far away from the Wall Street rumor mill.

“Being insulated from the (investment) stories in Salt Lake City allows us to remain more long-term oriented,” he said.

Besides, the main disadvantage of geographic isolation isn’t so critical these days with the tremendous advances in telecommunications.

Perhaps because Stewart and company are off the beaten path, the Aggressive Equity portfolio has been slow to attract investors. The fund has doubled in size within the past year but still counts only about $50 million in assets. Three other Wasatch funds--a growth, income and mid-cap portfolio--have a mere $20 million combined.

All four Wasatch funds (800-551-1700) are no-commission products. Wasatch Aggressive Growth’s annual expense ratio of 1.5% is about average for its peer group.

Before his stints as SEC regulator and mutual fund manager, Stewart worked for three years as an assistant professor of finance at Columbia University in New York.

He later moved to the University of Utah in Salt Lake City, where he continues to teach investment classes part time. Two of his four research analysts at Wasatch are former students at Utah.

While Stewart may not fit the classic business professor mold, he certainly doesn’t turn his back on his academic training.

“The best thing I got from the academic world is this: Anytime you get a great stock idea, assume that others know about it and have reflected that knowledge in its price,” he said.

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