The lead manager at the world's top-ranked small-cap fund crushes peers in the riskiest part of the market. He reveals the 4 attributes he looks for in a stock pick.

Wasatch Global Investors

• Ken Korngiebel's Wasatch Micro Cap Fund beat 99% of its peers in 2019, and it's consistently stayed ahead of its peers throughout the last two decades.
• Korngiebel is investing in companies that might have a short track record and depend heavily on a few key people.
• He told Business Insider he makes sure he's getting his calls correct by zeroing in on these four areas.
• Visit Business Insider's homepage for more stories.

It's survival of the fittest in Ken Korngiebel's portfolio.

When he took over as manager of the Wasatch Micro Cap Fund in 2017, he decided he wanted to shrink it. He's reduced the number of stocks in his portfolio to 75. And now that it's more concentrated, he won't add a new stock to the fund unless it's clearly better than one he already holds.

"There's always competition for capital," he told Business Insider in an exclusive interview. "A new idea needs to compared with an existing idea to see what might be better going forward."

That's helped him raise the level of a fund that was already highly successful. The micro cap fund beat 99% of competing funds in 2019. Kiplinger ranks it as one of the 10 best small-cap mutual funds over the past three, five, 10, and 20 years. It's also picked up a five-star rating from Morningstar along the way.

The small-cap landscape is a broad one and Korngiebel can't hang on to many companies that outgrow it, so the competition is intense.

He explained that he's always looking for these four qualities before he adds a company to his fund.

(1) Revenue growth

"Revenue growth is where I start," Korngiebel said. "Without topline growth, ultimately you run out of bottom line growth."

His portfolio is filled with two kinds of companies: Steady, mature businesses that are posting revenue growth in the mid-single digits, and companies that might be at an earlier stage, but are posting sales growth of 20% to 40% a year.

For the latter group, he says it's vital that they're growing under their own power and not just snapping up their competition.

"When you're dealing with micro caps and small caps, the types of stocks that we're looking for that can go on to be big companies, it begins with revenue growth and particularly organically," he said.

(2) Economic power

Korngiebel spends a lot of time examining companies that are in early stages of development, and when he does buy a stock, he expects to hang onto the stocks for five years. So he wants to know everything he can about the company's margins, profitability, competition, and how they might evolve over that time.

"Understanding the core economics of the business in terms of what's the margin profile today (and) what would that margin profile look like at more revenue scale" is critical, he said. "We want to understand the competitive intensity of the industry, because that directly influences how much market share a company is going gonna take and therefore what the future profitability of the firm looks like."

(3) Outstanding management

"This is a part of the market which is, I think, really dependent on your assessment of management because these aren't big companies," Korngiebel says. "The benches aren't as deep."

When he's enthusiastic about a company, an exceptional management team is always a major reason. And he says he goes into a lot of depth in examining those companies.

"I have on a retainer a former investigative journalist who conducts background due diligence and interviews of former employees to help us understand certain questions we might have about any particular executive," he said.

(4) Disruption

"You're looking for companies that have innovative products, technologies that map on to large markets that have great business models," Korngiebel said of his highest-upside investments.

At the end of 2019 a whopping 57% of his holdings were in either healthcare or technology companies. He says he targets those two industries because they're the best places to find the kinds of groundbreaking new technologies he can invest in.

Combined with the other data he's gathered, that gives him a good idea about the trajectory of the companies he's evaluating.

"We can make some pretty educated forecasts about competitive environment with the likelihood is of capturing market share, significant revenue growth and ultimately cashflow and profitability," he said.

NOW WATCH: There's a formula to winning the Oscars, and it's all in the statistics