Wasatch Emerging Markets Small Cap Fund® (WAEMX)  Invest in this Fund 

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Q1 2018
Emerging Markets Held Up Well as Global Markets Turned Choppy
by Roger Edgley, CFA, Andrey Kutuzov, CFA, Scott Thomas, CFA and Kevin Unger, CFA

“We see the current resumption of more normal volatility as being healthy for markets, as it has taken away some of the complacency that had been building. Although emerging markets have also become more volatile, they have held up relatively well compared to the rest of the world.”

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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 Emerging Markets Small Cap Fund for the one-, five- and 10-year periods were 25.68%, 2.38%, and 7.13%, and the returns for the MSCI Emerging Markets Small Cap Index were 18.62%, 4.58% and 4.36%.  Expense ratio: Gross 2.02% / Net 1.96%.


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.


For the three months ended March 31, 2018, the Wasatch Emerging Markets Small Cap Fund—Investor Class gained 0.31% and slightly outperformed its benchmark, the MSCI Emerging Markets Small Cap Index, which returned 0.17%.

The first quarter of 2018 saw significant volatility following an extremely strong year for global equity markets in 2017. World equity markets kicked off 2018 with a strong January rally, before rising U.S. interest rates disrupted the advance during the final sessions of the month. Later, concerns about global trade moved to the forefront when the White House announced tariffs on imported aluminum and steel. Separate measures directed specifically at China added to investors’ worries, which appeared to intensify after China retaliated with tariffs on U.S. goods. Financial markets remained volatile throughout most of the quarter, as heightened uncertainty kept investors on edge. While markets have been choppy and some uncertainty has surfaced, our outlook is still upbeat given the investment opportunities we have been seeing.

Korea added the most to the Fund’s returns and was the top contributor to outperformance relative to the benchmark, despite being underweight. Other countries of strength for the Fund included Taiwan and China. With global uncertainty and trade concerns dominating the headlines, we believe the Fund’s focus on companies tied to secular demand growth in their home countries served our investors well during the first quarter. India and Brazil detracted the most from the Fund’s return. The Fund outperformed the benchmark in India but underperformed in Brazil.


South Korea was our largest contributor for the quarter, up approximately 13%. We remain enthusiastic about Korean small caps for a number of reasons. We see new founder-led companies in many areas, especially health care, information technology (IT) and the internet.

Three of the Fund’s top 10 contributors for the first quarter were from Korea. Medytox, Inc., based in Korea, manufactures neurotoxins for cosmetic applications and the treatment of muscular disorders. Shares of Medytox surged as investors factored positive future developments into the company’s stock price. Approaching key decision points include the potential approval of Medytox products in China in 2019, as well as a previously announced licensing deal with Allergan plc.†† Having owned the stock in the Fund in anticipation of these developments, we were pleased to see the company begin to get the recognition we think it deserves.

Douzone Bizon Co. Ltd. in Korea was another one of the Fund’s top contributors for the quarter. The company is the leading accounting software and enterprise resource planning (ERP) provider in Korea with clear dominance among small and medium-sized enterprises (SMEs). Douzone has done well to shift clients toward its cloud solutions, which has resulted in faster growth for the company. Douzone has been benefiting from the structural adoption of cloud computing among SMEs in the Korean market.

Koh Young Technology, Inc. designs and manufactures precise 3D measurement and inspection equipment used for testing the accuracy and reliability of circuit-board assemblies and semiconductors for IT companies world-wide. The benefit of 3D inspection is that it decreases the failure rate of printed circuit boards and removes the requirement for human inspection. Koh Young is headquartered in Seoul, with offices in Germany, the U.S., Japan, Singapore and China. Koh Young has seen high demand for its 3D optical inspection equipment used in manufacturing semiconductors, integrated circuits and other components used in electronics. Our favorable view of the company continues to be supported by recently reported strong earnings growth.

The common thread with these three Korean companies is that they each have made new technological advances. They also have strong returns on capital to help drive their research and the growth of their businesses. Korea’s strong base of an educated population and the manufacturing know-how of global giants like LG and Samsung†† drives a world-class ecosystem for small companies where being an entrepreneurial company is no longer a disadvantage. Like Japan, we see an exciting band of what we call “new generation” publicly listed companies.

Taiwan is the largest country weight in the Fund, at a weighting slightly greater than that of the benchmark. The Fund’s holdings in Taiwan outperformed those in the benchmark for the quarter and added nicely to relative performance. Stabilization in China and the general cyclical improvement in the U.S. and emerging markets have been positive for Taiwanese companies.

Chroma ATE, Inc. (Taiwan) was one of the Fund’s top contributors for the quarter. Chroma was also a significant contributor for calendar year 2017, as the stock rose over 75%. The company is a world leader in supplying precision test and measurement systems and is a leader in testing technology for electric vehicles as well as 3D sensors. The stock was up based mostly on the improved outlook for electric-vehicle manufacturer Tesla.

The Fund continues to be structurally underweight in China, although we are cautiously constructive and have continued to methodically increase our weight. While we remain conscious of the many risks, our assessment of the investment backdrop in China has moved from negative to more neutral. We see signs of stabilization in the market and the currency, and the fundamentals of the companies we’ve visited appear to be improving. Manufacturing activity has picked up, as have exports. In our estimation, Chinese companies have been allocating capital better with lower capital expenditures and higher returns on equity. We’ve been finding more interesting companies that meet our quality standards and have long-duration growth potential. At the same time, we believe China’s unique challenges require a higher return threshold.

51job, Inc. was one of the Fund’s top contributors for the quarter. 51job is the leading online job search and recruitment site in China. The company also has a human resources (HR) outsourcing business that differentiates it from many competitors. This is a company that we have known for a long time with a solid management team. The human resource and employment services industry in China is quite mature with the two top players accounting for approximately 70% of the total market. 51job is leveraging its relationships with employers to sell additional adjacent services that HR departments need. In both the online recruitment and other HR business segments, the company has continued to post robust results.

One of the Fund’s largest sources of weakness was Brazil, where buoyant investors appeared to rotate away from the higher-quality companies we seek to own. Brazilian stocks soared to record highs after an appeals court upheld a corruption conviction against former President Luiz Inacio Lula da Silva. The court’s ruling significantly damages the future presidential aspirations of Mr. Lula, whose far-left leanings spook many investors. With investor sentiment on the upswing in Brazil, the most defensive of our Brazilian holdings became less appealing to investors.

EcoRodovias Infraestrutura e Logistica S.A. is the second-largest toll-road operator in Brazil. The road network in Brazil is over-crowded and under-developed as is typical for emerging markets. The toll-road industry in Brazil appears solid, with rational competition, more projects coming up for bid and a recovering economy. In February, EcoRodovias agreed to buy Concessionaria de Rodovias Minas Gerais Goias (MGO), which manages a 271-mile highway in the Brazilian states of Goias and Minas Gerais, pending approval of regulators. The stock was the Fund’s largest detractor from performance for the first quarter.

Raia Drogasil S.A., another detractor, operates a leading drug-store chain in Brazil. The upturn in Brazil’s economy has made defensive issues such as Raia Drogasil less appealing to investors and has increased access to capital for the company’s competitors. Additionally, Raia Drogasil reported a slowdown in same-store sales growth during its most-recent quarter. Management cited adverse calendar effects and unusually colder and rainier weather, especially during peak days of the holiday shopping season. We believe these are temporary setbacks that do not significantly impact the company’s long-term growth prospects.

The Fund’s Indian stocks declined less than the Indian positions in the Index during the quarter, and because the Fund’s weight is currently roughly equal to that of the Index, the result was a positive effect on performance relative to the benchmark. Nevertheless, the decline in the Fund’s Indian stocks subtracted just over a point from the Fund’s return. Indian equities fell amid concerns about interest rates and inflation, which have been on the rise in India since mid-2017. Investors also have become more concerned with potential policy continuity after the electoral showing of Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP) in recent state elections was weaker than expected.

Kajaria Ceramics Ltd. was another large detractor for the quarter. The company is the leading manufacturer of ceramic tiles in India. We believe Kajaria Ceramics has a strong competitive advantage due to its brand, distribution capabilities and manufacturing scale. Indian tile purchases are very low even by emerging-market standards, so there is significant room for growth. The company is family owned and operated with what we see as an excellent management team. January was a difficult time for Indian tile manufacturers due to a number of one-off factors including a second round of goods-and-services tax (GST) reforms and rising input costs. However, we believe there is reason to expect a return to growth in the near term as new GST legislation should improve compliance with the program. In addition, the new GST rate on tiles was lowered as of November 2017, and there has been an uptick in housing construction, which is a strong market for tiles.

Berger Paints India Ltd. also detracted for the quarter. Berger is the second-largest decorative-paint company in India. We see Berger Paints as an excellent business with stable demand as the penetration of decorative paint in India is low by world standards. Berger is focused on its brand and mainly sells to retail buyers. The capital required for its paint plants is low compared to other types of manufacturing plants, and the business generates high cash flow, has high margins and has produced stable growth. The disruption experience by Berger Paints from the GST was short-lived and the stock was a strong contributor for the month of December. The stock was then one of the largest detractors in January and detracted for the quarter overall. We had a phone meeting with management to determine if the weakness was due to increased competition in the decorative-paint market in southern India and came away confident in the long-term health of the company. (Current and future holdings are subject to risk.)


The backdrop for international small-cap equities remains constructive. However, financial volatility in developed countries spread to emerging markets in the first quarter as concerns about accelerating fiscal deficits and inflation in the U.S. fanned fears of higher global interest rates.

It is worth considering whether we see risks rising in emerging markets along with risks rising in global markets. Returns for global equity markets were very strong last year, driven by higher-than-expected growth and a level of synchronized growth across major economies we have not seen for some years. In 2017, market volatility was unusually subdued. Aside from a few down periods, the S&P 500® Index saw volatility of around 10% in 2017. Using the U.S. as an indicator for 2018, sentiment and risk have become much more elevated. The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) hit 37% in February. It has come down since, with the VIX high for March at about 25%. The European index for volatility—the EURO STOXX 50® Volatility Index—also spiked in February. Economic risk perceptions seem to be increasing with the prospect of rising interest rates, so this has also pushed up volatility in the equity markets. The thematic part of this has been the much-changed sentiment around large-cap technology stocks, which have been big market drivers over the past few years. Add to this the recent inflammatory rhetoric around trade wars and the outlook for the financial markets looks less rosy than it did in the last half of 2017. How have emerging markets fared given heightened risk expectations?

Over the past six months, the return spread between the mostly large-cap MSCI Emerging Markets Index and the MSCI Emerging Markets Small Cap Index has narrowed so it is negligibly close. We think that bodes well for the Fund since over the last two years, the spread has been about 11 percentage points in favor of the large-cap Index. Volatility in emerging markets edged up to the 16% level as of March 31, 2018, but remained below that of the S&P 500 Index. Emerging-market currencies, as reflected in the currency indexes, still look solid and have been doing well against the U.S. dollar. Within emerging markets, India and China—after a very strong year—have not had a major correction in this latest move. Looking at the Citi Economic Surprise Index (which tracks actual economic data against market expectations), we see that the readings for emerging markets and China were strong in March.

We see the current resumption of more normal volatility as being healthy for markets, as it has taken away some of the complacency that had been building. Although emerging markets have also become more volatile, they have held up relatively well compared to the rest of the world. For the first quarter, the MSCI Emerging Markets Index returned 1.42% and outperformed the MSCI World Index, which declined -1.28%.

To the extent that global factors continue to create volatility, we expect the Fund’s relative performance to benefit from our greater emphasis on companies with long-term growth stories tied to secular increases in domestic demand. By focusing on companies and countries with their own unique growth drivers, we seek to make the Fund less subject to whims of the global economy and more reflective of long-term potential. Despite this increased volatility, our overall positive outlook remains unchanged.

Thank you for the opportunity to manage your assets.


Roger Edgley, Andrey Kutuzov, Scott Thomas and Kevin Unger


The MSCI Emerging Markets and Emerging Markets Small Cap Indexes are free float-adjusted market capitalization indexes designed to measure the equity market performance of emerging markets. You cannot invest in these or any indexes.

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)

CFA® is a trademark owned by CFA Institute.

The Wasatch Emerging Markets Small Cap Fund’s investment objective is long-term growth of capital.

††As of March 31, 2018, the Wasatch Emerging Markets Small Cap Fund was not invested in Allergan plc, LG Corp. or Samsung Electronics Co. Ltd.

The Citi Economic Surprise Index measures economic data surprises relative to market expectations. A positive reading means the data releases have been stronger than expected. A negative reading means the data releases have been worse than expected. You cannot invest directly in this or any index.

The “cloud” is the internet. Cloud-computing is a model for delivering information-technology services in which resources are retrieved from the internet through web-based tools and applications, rather than from a direct connection to a server.

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

The VSTOXX indexes are based on EURO STOXX 50 real time options prices and are designed to reflect the market expectations of near-term up to long-term volatility by measuring the square root of the implied variance across all options of a given time to expiration. You cannot invest directly in this or any index.

The MSCI World Index captures large and mid cap representation across 23 developed market countries. With 1,653 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. You cannot invest directly in this or any index.

VIX is the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market’s expectations of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 Index options. This volatility is meant to be forward looking and is calculated from both calls and puts. The VIX is a widely used measure of market risk and is often referred to as the “investor fear gauge.” You cannot invest directly in this or any index.

The MSCI Emerging Markets and Small-Mid Cap Indexes are free float-adjusted market capitalization indexes that are designed to measure equity market performance in the global emerging markets.  

You cannot invest directly in indexes.

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