Wasatch Global Value Fund (FMIEX)  Invest in this Fund 

Investor Class | Institutional Class
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2Q19
Markets Focus on Macro News Over Company Valuations and Fundamentals
by David Powers, CFA, CAIA, CPA

“In our view, recent stock gains have been driven largely by anticipation of Fed rate cuts.”

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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 June 30, 2019, the average annual total returns of the Wasatch Global Value Fund-Investor Class for the one-, five- and ten-year periods were 5.57%, 5.53% and 9.63%, the returns for the MSCI ACWI were 5.74%, 6.16%, and 10.15%.  Expense ratio: Gross 1.19% / Net 1.11%.

 

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 returned 1.39% for the second quarter, underperforming its benchmark, the MSCI AC World Index, which returned 3.61%. The Fund also modestly lagged the MSCI AC World Value Index, which returned 2.46%.

Large-cap U.S. equities returned 4.30% in the quarter as measured by the S&P 500® Index, compared to 3.68% for international equities as gauged by the MSCI EAFE Index. After starting the period on a positive note, stocks dipped in May as U.S.-China trade tensions flared up. Investors feared an escalating trade war would threaten the already fragile global growth backdrop. However, risk sentiment rebounded in June as the U.S. Federal Reserve (Fed) signaled its readiness to cut interest rates if necessary to offset the recessionary effect of tariffs.

Within the global equity universe as measured by the MSCI AC World Index, the best-performing sectors for the quarter were financials, information technology, industrials and consumer discretionary. Energy, real estate and health care were the main laggards. Within the Fund, contributions to performance relative to the benchmark were led by our holdings in the health-care and consumer-staples sectors. Information technology and energy weighed most heavily on relative results.

Geographically, the Fund’s holdings in the United Kingdom and Germany were strong contributors, while the U.S., China and Japan were notable underperformers. We finished the quarter with a little over half of the Fund’s assets invested in the U.S. and the remainder spread across 14 other countries. Outside of the U.S., our typical country weight is small and driven predominantly by company- and sector-specific factors as opposed to trying to manage exposure to a specific country.

Details of the Quarter

Our position in low-cost retailer Walmart, Inc. (WMT) was one of the top contributors to performance for the second quarter. Walmart reported strong results and raised guidance for its 2020 fiscal year. Earnings growth drove results helped by increasing revenue and profitability. Importantly, Walmart has made significant inroads on the e-commerce side, where growth has been double that of the broader segment. The stock also benefited from Walmart being viewed by investors as a relatively defensive holding. We continue to like the company. Walmart is one of the few retailers displaying improving profitability.

Swiss pharmaceutical giant Novartis AG is the largest position in the Fund and was the top contributor to performance. The company’s innovative-medicines segment drove positive results, and management provided improved guidance with respect to its earnings growth target. The stock price at current levels does not in our estimation reflect the growth potential given recently launched products and the company’s development pipeline.

A position in Munich Reinsurance Co. also added to performance. Munich Re and other reinsurers help companies underwriting property and casualty (P&C) insurance policies to mitigate the impact of large claims by assuming some of the risk of loss in exchange for a portion of the premiums earned. The P&C and reinsurance segments are less affected by the economic cycle or by financial market volatility than the banking and life insurance industries, which worked in the stock’s favor in the quarter. In addition, we believe Munich Re is poised to benefit from enhanced pricing after large payouts related to the numerous catastrophes seen in 2018.

On the downside, offshore drilling contractor Ensco Rowan plc (ESV) was the biggest detractor from Fund performance for the quarter. As a provider of jack-up rigs, semi-submersible platform drilling rigs and drill ships, Ensco Rowan carries a large amount of debt and has high operating leverage. Results have been negatively impacted by the volatility in the price of oil seen in recent quarters, and the company cut its dividend to preserve cash. We reduced the position as the timing of a recovery in rig utilization rates is uncertain, but view the stock as having the potential to rebound sharply when conditions improve.

China Mobile Ltd. was another leading detractor. As China’s largest telecommunication-services provider, China Mobile has an exceptionally strong balance sheet featuring a large amount of cash and virtually no debt. However, as a state-owned enterprise the company has seen its results negatively affected by government-mandated cuts in mobile-data tariffs and the elimination of domestic data roaming charges. In addition, the company’s new chairman has taken a conservative approach to the dividend, perhaps looking ahead to 5G build-out expenses. Finally, the U.S.-China trade war has led to China Mobile being excluded, for now at least, from the U.S. market. We took advantage of the stock’s decline to add to our position during the quarter as we view the weakening in fundamentals as temporary.

Exelon Corp. (EXC) also detracted for the quarter. Exelon is the largest U.S. regulated utility holding company and operator of nuclear power plants. We see no fundamental reason for the stock’s fall during the quarter. Furthermore, our investment thesis remains intact. Our rationale for investing in Exelon centers on the expansion of the company’s regulated utility business, which provides substantial and reliable cash flow. In our view, Exelon’s share price was pressured by profit-taking and a move by investors toward less defensive sectors following the Fed’s policy shift. Indeed, while we continue to like the company, we trimmed the position in recognition of the downside pressure on the stock. (Current and future holdings are subject to risk.)

Outlook

Growth stock returns have outpaced those of their value counterparts by a wide margin so far in 2019. This longstanding trend has not been helpful in terms of the Global Value Fund’s performance relative to its benchmark. Some of this stylistic headwind has been the result of typical late-cycle dynamics under which growth is increasingly rewarded as it becomes harder to find.

In our view, recent stock gains have been driven largely by anticipation of Fed rate cuts. At some point the market will begin to move past a “relief rally” and register more fully the reasons behind the Fed’s policy shift. With economic data showing that growth is slowing globally, we anticipate positive but low earnings growth over the next few quarters, along with lowered estimates. Should the outlook for earnings growth turn negative, the market reaction is likely to be significant.

As a result, we continue to prefer a defensive-minded approach. The Fund remains tilted toward companies we see as being higher quality within the global large-cap value universe, as gauged by lower market sensitivity, lower valuations, higher cash flows, higher dividends, and stronger balance sheets. In geographic terms, we are currently finding more attractively valued investment opportunities overseas.

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 2,771 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 Wasatch Global Value Fund’s investment objectives are to seek capital appreciation and income.

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

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 is an equity index that captures large- and mid-cap representation across 21 developed-market countries around the world, excluding the United States and Canada. 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. You cannot invest directly in this or any index.

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.

  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

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