Finance

The American financial markets are currently anticipating the emergence of several colossal initial public offerings (IPOs). Even those with a cursory understanding of the financial landscape are familiar with privately held technology giants such as SpaceX, Anthropic, and OpenAI. Companies like Databricks and Stripe also command substantial valuations. The first two have already indicated their intentions to go public.

A critical consideration for investors revolves around the integration of these new public entities into major market indices. Policies for index inclusion differ significantly. For example, the S&P 500 mandates profitability for eligibility, whereas indices like CRSP and the Nasdaq 100 permit earlier entry, often with adjustments made for free float. Initially, the weighting of these IPOs within prominent indices is expected to be modest due to insider lockups, but this will progressively increase as more shares become publicly available post-IPO.

It's worth noting that historical data often indicates that individual IPO stocks tend to underperform the broader market following their initial listing. This trend underscores the enduring advantage of a diversified, passive investment approach, which remains a superior strategy for long-term growth and stability.

Embracing a disciplined, long-term investment strategy that prioritizes broad market diversification and cost-efficiency can lead to more resilient portfolio performance. Rather than chasing the ephemeral excitement of individual IPOs, investors can achieve greater success by focusing on foundational principles that foster sustained financial well-being.

The Wasatch Ultra Growth Fund's Investor Class experienced a notable dip in performance during the initial quarter of 2026, falling behind its designated benchmark, the Russell 2000 Growth Index. Despite commendable gains from its biotechnology holdings, the overall healthcare sector proved to be the most significant drag on the fund's returns. Conversely, companies specializing in semiconductor equipment, particularly those involved in advanced packaging, metrology, and inspection, emerged as strong contributors, bolstering the fund's performance during this period.

During the first quarter of 2026, the Russell 2000 Growth Index saw a decline of -2.81%. In comparison, the Wasatch Ultra Growth Fund—Investor Class experienced a more substantial decrease, reporting a decline of -8.33%. This disparity highlights a period of underperformance for the fund relative to its benchmark. A key factor in this underperformance was the healthcare sector, where despite individual strong performers in biotechnology, overall stock selection within the sector did not meet expectations. Meanwhile, specific segments of the technology sector provided a silver lining. Semiconductor-equipment manufacturers, particularly those focusing on advanced packaging, metrology, and inspection technologies, significantly contributed to the fund's positive returns. These companies benefited from increasing demand driven by advancements in data center infrastructure and the growing complexity of chip architectures essential for artificial intelligence applications.

John Malooly, CFA, the Lead Portfolio Manager with 28 years at Wasatch and 14 years on the fund, along with Natalie Pesqué, CFA, also a Lead Portfolio Manager with 10 years at Wasatch, oversee the portfolio. Their strategy emphasizes navigating a dynamic market, evidenced by their adjustments in software positions vulnerable to AI disruption and their focus on companies with enduring competitive advantages. This approach aims to safeguard the portfolio against emerging technological shifts while capitalizing on robust growth opportunities. The fund, primarily focused on small-cap investments, consistently evaluates macroeconomic and geopolitical landscapes. For instance, while global conflicts and energy price volatility introduce uncertainty, the managers have confirmed that current holdings lack direct exposure to these specific risks, allowing for continued adherence to a long-term growth investment philosophy.

In summary, the first quarter of 2026 presented a challenging environment for the Wasatch Ultra Growth Fund, as it underperformed the Russell 2000 Growth Index. While the healthcare sector, particularly beyond biotechnology, negatively impacted results, strong performances from semiconductor-equipment stocks tied to advanced manufacturing technologies provided a crucial counterbalance. The fund’s managers continue to strategically adjust the portfolio, prioritizing companies with strong competitive moats and managing risks, while maintaining a long-term perspective on growth opportunities despite broader economic and geopolitical uncertainties.