Wasatch Global Value Fund® (FMIEX)  Invest in this Fund 

Investor Class | Institutional Class
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Q1 2018
Market Volatility Increased on Inflation, Trade Concerns
by David Powers, CFA, CAIA, CPA

“We continue to believe large-cap value stocks are better positioned to weather late-cycle dynamics than their growth and momentum counterparts.”

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As of 10/31/17, the Wasatch Large Cap Value Fund changed its name to the Wasatch Global Value Fund. Prior to 10/31/17, the Fund's primary benchmark was the Russell 1000 Value Index.

Investments in value stocks can perform differently from other types of stocks and from the market as a whole and can continue to be undervalued by the market for long periods of time. Loss of principal is a risk of investing.
Investing in foreign securities, especially in emerging markets, entails special risks, such as currency fluctuations and political uncertainties, which are described in more detail in the prospectus.

For the period ended March 31, 2018, the average annual total returns of the Wasatch Global Value Fund-Investor Class for the one-, five- and ten-year periods were 6.09%, 8.20% and 5.81%, the returns for the MSCI ACWI (All Country World Index) were 14.85%, 9.20%, and 5.57%, and the returns for the Russell 1000 Value Index were 6.95%, 10.78%, and 7.78%.  Expense ratio: Gross 1.19% / Net 1.10%.

 

Data shows past performance, which is not indicative of future performance. Current performance may be lower or higher than the data quoted. To obtain the most recent month-end performance data available, please click on the “Performance” tab of the individual fund under the “Our Funds” section. The Advisor may absorb certain Fund expenses, without which total return would have been lower. Investment returns and principal value will fluctuate and shares, when redeemed, may be worth more or less than their original cost.

Wasatch Funds will deduct a 2.00% redemption proceeds fee on Fund shares held 60 days or less. Performance data does not reflect the deduction of fees, including sales charges, or the taxes you would pay on fund distributions or the redemption of fund shares. Fees and taxes, if reflected, would reduce the performance quoted. Wasatch does not charge any sales fees. For more complete information including charges, risks and expenses, read the prospectus carefully.

Wasatch Funds are subject to risks, including loss of principal.

Overview

The Wasatch Global Value Fund—Investor Class declined -1.64%, lagging its benchmark, the MSCI ACWI (All Country World Index), which fell -0.96% in the first quarter of 2018. However, the Fund bested the MSCI ACWI Value Index, which lost
-2.62%

U.S. equities declined -0.76% in the first quarter of 2018 as measured by the S&P 500® Index, while international equities as gauged by the MSCI EAFE Index declined
-1.53%. February saw stock prices dive on concerns over the prospect of higher inflation and worries that central banks across the globe would accelerate the withdrawal of monetary support. After regaining much of the lost ground, stocks would again waver in March on speculation that the Trump administration’s plans to impose tariffs on Chinese imports would lead to a global trade war.

Continuing the trend that was in place throughout 2017, stocks that typically do well when in times of economic growth, including those in sectors such as information technology and financials, led the benchmark’s performance in the quarter. Conversely, more defensive, value-oriented stocks generally lagged. To illustrate the growth versus value split, consider that the MSCI ACWI Growth Index gained 0.67% while the MSCI ACWI Value Index lost -2.62%.

In this environment, our efforts to position the Fund more defensively, given what we see as an economy in the latter stages of the business cycle, hindered performance. Performance for the Global Value Fund was constrained principally by the consumer-staples, energy and financials sectors. Stock selection within materials, utilities and industrials contributed the most to performance relative to the benchmark. The Fund’s U.S. holdings, about half of the portfolio, were down for the quarter while our international holdings finished slightly positive. In terms of positioning, we continue to believe that our defensive-minded, globally diversified approach will be beneficial when late-cycle dynamics begin to take hold.

Details of the Quarter

Leading individual contributors to the Fund’s performance in the quarter included a position in Ireland-based Smurfit Kappa Group plc (SKG), Europe’s largest corrugated-box manufacturer. The company’s shares moved higher on a buyout offer from U.S. rival International Paper.†† We took advantage of the upward movement in the stock price and sold our position. Smurfit Kappa’s management has signaled plans to increase capital expenditures, which we view as a somewhat risky step at this stage of the economic cycle.

A position in technology company Cisco Systems, Inc. (CSCO) also added to performance. In 2017, Cisco’s revenues decreased as the company underwent an investment cycle. During the first quarter, management reported strong results that showed an increase in revenues and raised guidance for the upcoming quarter. Notably, Cisco has seen an increase in recurring revenue as it moves from selling hardware and networking services to a subscription-based business model. In addition, the company expects to be a prime beneficiary of tax reform, and plans to deploy a significant portion of its $67 billion in cash holdings in the form of a share-buyback program.

Another strong performer among the Fund’s holdings was Guangdong Investment Ltd., a Hong Kong-based conglomerate primarily engaged in the business of water distribution, but with additional segments in property investment and electric-power generation. We like the company’s strong balance sheet and the stability and growth potential of its core water-utility business. Guangdong has shown consistently impressive double-digit dividend growth for several years and saw its share price rise in the quarter as investors anticipated a further dividend increase.

On the downside, shares of Wells Fargo & Co. (WFC) suffered in the quarter as the bank reported revenue and net interest margin results that disappointed investors. In addition, Wells Fargo received a consent order in February from the Federal Reserve capping the growth of its balance sheet until certain issues around corporate governance and risk management have been addressed. We view Wells Fargo’s regulatory issues as fully reflected in the stock price at current levels, and believe the bank is well-positioned to return to a growth trajectory once the dust settles a few quarters out. We trimmed the position modestly during the quarter, principally as part of a larger effort to reduce the Fund’s overweight position in financials.

Another laggard was drugstore giant CVS Health Corp. (CVS), which reported strong results for the fourth quarter of 2017 but lowered its 2018 guidance, citing plans to increase investment. More broadly, sentiment with respect to CVS has been dampened in recent quarters by concerns over the pricing environment for its pharmacy benefit management business. In addition, CVS announced its intention to acquire insurer Aetna,†† and uncertainty around the approval, timing and terms of the deal weighed on the stock. We maintained the position as we view CVS as trading at a significantly discounted valuation given the company’s cash flow, stability of earnings and balance sheet.

A position in Sweden-based Nordea Bank AB was again a detractor from the Fund’s return in the quarter. Nordea is a leading provider of banking services across the Scandinavian countries. The bank is in the process of moving its operations and re-domiciling in Finland, where less onerous eurozone capital requirements should support shareholder-friendly measures such as increased share buybacks and higher dividends. At the same time, Nordea has been engaged in a capital-spending cycle focused on digital technology. This period of transition has constrained Nordea’s financial results, but we view the bank as poised to return to profit growth and have maintained the position. (Current and future holdings are subject to risk.)

Outlook

In the United States, the current bull market now spans nine years and counting. We have been saying for some time that the market cycle is considerably closer to its end than to its beginning. While sentiment in the first half of 2018 may continue to reflect the benefit of tax reform to corporate earnings, at some point we expect investors to begin to look ahead and discount the difficulty companies face of maintaining present levels of earnings growth. This is especially the case given the ongoing withdrawal of stimulus by central banks globally. Moreover, uncertainty around the potential ripple effects of U.S. tariffs directed at China may act as an additional headwind to confidence in global equities.

One thing that is clear from the quarter just ended is that the era of low volatility is likely over. Investors have been focusing their purchases on an increasingly narrow list of stocks, indicative of waning conviction regarding the market’s remaining upside. We continue to believe global large-cap value stocks are better positioned to weather late-cycle dynamics than their growth and momentum counterparts. The Fund remains tilted toward higher-quality companies within the large-cap value universe, as gauged by lower market sensitivity, lower valuations, higher cash flows, higher dividends and stronger balance sheets.

Thank you for the opportunity to manage your assets.

Sincerely,

David Powers

 

**The MSCI ACWI (All Country World Index) captures large and mid cap representation across 23 developed market and 24 emerging market countries. With 2,499 constituents, the Index covers approximately 85% of the global investable equity opportunity set. You cannot invest in this or any index.

Source: MSCI. The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indexes. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties or originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages. (www.msci.com)

The Russell 1000 Value Index measures the performance of Russell 1000 Index companies with lower price-to-book ratios and lower forecasted growth values. The Russell 1000 Index measures the performance of the largest 1,000 companies in the Russell 3000 Index. The Russell 3000 Index is an unmanaged total return index of the largest 3,000 U.S. companies based on total market capitalization. You cannot invest in this or any index.

Frank Russell Company is the source and owner of the Russell Index data contained or reflected in this material and all trademarks and copyrights related thereto. This is a presentation of Wasatch Advisors, Inc. The presentation may contain confidential information and unauthorized use, disclosure, copying, dissemination or redistribution is strictly prohibited. Frank Russell Company is not responsible for the formatting or configuration of this material or for any inaccuracy in Wasatch Advisors, Inc.’s presentation thereof.

CFA® is a trademark owned by CFA Institute.

The Wasatch Global Cap Value Fund’s investment objectives are to seek capital appreciation and income.

††As of March 31, 2018, the Wasatch Global Cap Value Fund was not invested in International Paper Co. or Aetna, Inc.

A bull market is defined as a prolonged period in which investment prices rise faster than their historical average. Bull markets can happen as the result of an economic recovery, an economic boom, or investor psychology.

Earnings growth is a measure of growth in a company’s net income over a specific period, often one year.

The MSCI ACWI Growth Index captures large and mid cap securities exhibiting overall growth style characteristics across 23 developed-markets countries and 24 emerging-market countries. You cannot invest directly in this or any index.

The MSCI ACWI Value Index captures large and mid cap securities exhibiting overall value style characteristics across 23 developed-markets countries and 24 emerging-market countries. You cannot invest directly in this or any index.

The MSCI EAFE Index captures large and mid cap representation across developed market countries around the world, excluding the United States and Canada. With 928 constituents, the Index covers approximately 85% of the free float-adjusted market capitalization in each country. You cannot invest directly in this or any index.

The S&P 500 Index includes 500 of the United States’ largest stocks from a broad variety of industries. The Index is unmanaged and is a commonly used measure of common stock total return performance.

Valuation is the process of determining the current worth of an asset or company.

The MSCI ACWI is a broad-based market index that captures large and mid-cap representation across 23 developed markets and 24 emerging markets countries.  The Index commenced operations on 01/01/2001, after the Fund commenced operations.  MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used to create indices or financial products.

  The Russell 1000 Value Index measures the performance of those Russell 1000 Index companies with lower price-to-book ratios and lower forecasted growth values.  Russell Investment Group is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Russell Investment Group. 

You cannot invest directly in indexes.

View the Global Value Fund’s most current Top 10 Holdings

Portfolio holdings are subject to change at any time. References to specific securities should not be construed as recommendations by the Funds or their Advisor.

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CFA® is a trademark owned by CFA Institute.