For the better part of this decade, being a small-cap managerwas the investing equivalent of being a rock star. Impressive gains year after year ensured a steady stream of money and fans into funds that invested in small-cap stocks. From 2000 through 2007, the Russell 2000 gained 6.7% on average, annually, while the S&P 500 returned just 1.66%.

Wasatch, the Salt Lake City-based fund management firm known for its small-cap acumen, gained a following during this time by deftly investing in small stocks on their way to the big time. The firm was so successful at attracting assets that it stopped accepting fresh investments in many of its funds for fear that managers would be unable to put new money to work.

Hard Times

How times have changed. With stocks suffering across the board, investors are yanking money out of funds. In the first five months of the year, shareholders withdrew almost $79 billion from diversified U.S. equity funds, according to Lipper. Wasatch has suffered alongside the market, in both performance and asset-gathering. With significantly slimmed-down portfolios, a handful of

Wasatch funds reopened, much to the delight of investors. "We were in an uncomfortable position with advisors," notes J.B. Taylor, co-manager of the $767 million Wasatch Core Growth fund, which reopened to investors in March. "Because we had a hard close in 2003, advisors weren't able to keep their existing models the same for new clients because they couldn't get into the fund." In a hard close, even existing investors can't contribute new money to a fund.

While the reopening of a much-lauded fund might be reason for celebration, today's rough market environment certainly is not. Wasatch Core Growth is inviting shareholders back in during one of its worst performance periods ever.

For the year ended July 9, the fund lost 25.6%, trailing 83% of its small-cap growth peers, according to Morningstar. For the past three years, it is down 3.5% and lagging behind 89% of its competitors. Over the past 10-year time frame, however, the fund returned 9.6% a year annually, placing it in the category's top 10%.

Any future closes, Taylor says, won't be hard ones. Advisors will be able to contribute additional client money even if the fund is unavailable to new investors. At today's asset level of $767 million, though, it will be a while before investors need to worry about that. Taylor says that Core Growth will remain open at least until assets top $2.5 billion.

With stock losses growing, Taylor and co-manager Paul Lambert are finding bargains. "The market is so narrowly focused on energy stocks now, and small caps have gone out of favor so quickly that some great companies are being thrown out," Taylor says.

Wasatch Core Growth has used the decline to upgrade into names it likes and shed those it doesn't. Taylor has pruned the portfolio from 90-odd issues to around 65. He looks for companies with proven track records, industry dominance, strong balance sheets and high insider ownership. He also looks for firms with at least a 15% earnings growth rate, and which can double in price within three to five years. That's a tall order to fill in today's economy, but Taylor believes that a bear market points investors toward solid companies that can withstand the pressures.

TOP PICKS

One example is Copart, the top provider of auction services to the insurance industry. It controls 30% to 40% of the salvage market. Copart acts as a middleman between insurers needing to dispose of beat-up cars and dealers or importers needing salvageable parts. "It's a great business model," Taylor says. "They don't have to tie up any capital in inventory, and their auctions are the most accessible at attracting buyers and sellers, which makes it the deepest market for these cars."

Until now, Copart has brokered auctions for automotive pros, but now the Fairfield, Calif.-based company is looking to expand into retail, a potential source of earnings growth. And the company has a solid history. Earnings grew by 40% in 2007. The stock is faring significantly better than the market, up 1.2% year to date through July 9.

Wasatch also favors Pediatrix Medical Group, which provides practice management services for pediatricians and neonatal doctors. It has attracted 15% to 20% of doctors in these fields. "The birth rate is very steady," Taylor says. "But the percentage of babies going into intensive care is growing due to the higher rate of high-risk pregnancies."

With $39 million in cash on its balance sheet and no debt, Pediatrix has plenty to invest in its own growth. The stock is down this year, off by 27% through July 9, hammered by a drop in the national birth rate in the first quarter. Medical companies are also spinning their wheels due to campaign-trail talk of healthcare reform. But Pediatrix can withstand these negatives, Taylor believes. "It's a well-run business and is relatively immune from healthcare reform."