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

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China and India Performed Very Differently in 2018
by Ajay Krishnan, CFA, Dan Chace, CFA, Roger Edgley, CFA, Andrey Kutuzov, CFA, Scott Thomas, CFA and Kevin Unger, CFA

“China’s A-share markets (Shanghai and Shenzhen) have been in a bear market since 2015, while India was one of the best-performing emerging markets in 2018.”

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For the period ended December 31, 2018, the average annual total returns of the Wasatch Emerging Markets Small Cap Fund for the one-, five- and 10-year periods were -18.95%, -0.28%, and 12.38%, and the returns for the MSCI Emerging Markets Small Cap Index were -18.59%, 0.95% and 9.87%.  Expense ratio: Gross 1.97% / Net 1.95%.


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 fourth quarter of 2018, the Wasatch Emerging Markets Small Cap Fund—Investor Class declined -6.12%. Over the same period, the MSCI Emerging Markets Small Cap Index lost -7.18%. For the 12 months ended December 31, 2018, the Fund fell -18.95% versus a decline of -18.59% for the MSCI Emerging Markets Small Cap Index. The MSCI Emerging Markets Index was down -14.58% for the year, and the MSCI Emerging Markets Currency Index fell -3.75% as the strong U.S. dollar made assets denominated in other currencies look less attractive to investors. Within emerging markets, large-cap stocks held up better than small caps for the year as evidenced by the -14.54% return of the MSCI Emerging Markets Large Cap Index, which was about four percentage points better than the MSCI Emerging Markets Small Cap Index. After 2017, when investors favored growth companies and more economically sensitive sectors such as industrials, the investing environment going into 2019 appears to be such that investors are likely to favor more defensive sectors such as utilities. This seems to be the case globally, not just in emerging markets. For calendar year 2018, if we compare the performance of developed markets using the MSCI EAFE Index to emerging markets using the MSCI Emerging Markets Index, we can see that the performance was fairly close—the EAFE Index was down -13.79%, while the Emerging Markets Index was down -14.58%. This means there was virtually nowhere for investors to hide in 2018.

Now as we enter 2019, it is worth reviewing the main factors affecting equity returns over the past 12 months, discuss whether we expect those factors to continue to play a role in 2019, and look at other trends. For international equities in general and emerging markets in particular, 2018 was marked by challenges and changes in the geopolitical and global economic outlook. U.S.-China trade relations were—and are—a major concern. The question of whether there will be a “deal” or “no deal” Brexit has created uncertainty for consumers and businesses in the United Kingdom. The outcome of Brexit will have far-reaching implications on both sides of the English Channel. In Europe, financial and political issues have dogged Italy, and the leaders of France and Germany face growing voter dissatisfaction. In Latin America, investors are trying to understand the direction in which the newly elected presidents of Mexico and Brazil might lead their countries. For 2019, there are plenty of weighty issues for investors to consider.

At Wasatch, we are bottom-up investors, which means we base our investment decisions on the outcome of our intensive research into the prospects of individual companies. Our view is that, while macro-related events and economic cycles can impact companies in the short term, the underlying value of the Fund’s holdings will persist over the longer term because they are high-quality companies as evidenced by their enduring competitive advantages, outstanding business models and management teams, and strong balance sheets and cash flows. Such companies have the ability to adapt quickly, continue to invest in their businesses, and take advantage of uncertainty and disruption to grow from cycle to cycle. In uncertain times such as we experienced in 2018, we believe quality is key and we are confident that our portfolio of high-quality, long-duration growth companies has the potential to be able to navigate turbulent markets and emerge stronger.

As the world’s second-largest economy, China is worth noting. Data released in mid-October showed China’s economic growth slowing to 6.5% during the third quarter. The weaker-than-expected pace was China’s slowest since the first quarter of 2009. Industrial output and retail sales for November also came in well below expectations, suggesting China’s trade war with the U.S. was beginning to impact the economy. The Beijing government vowed to support future growth by cutting taxes and keeping liquidity ample.

It is also worth noting the contrast in equity-market performance between China and another large emerging market—India. First, we’ll look at China. China’s A-share markets (Shanghai and Shenzhen) have been in a bear market since 2015. The CSI 300 Index is down some 45% since its peak in June 2015. At that time, we thought the stocks within the Index generally possessed excessive valuations and trading volume. Today, these stocks look more reasonably valued. And as we research A-share market companies we have been finding some with attractive growth prospects, valuations and quality. In 2018, China’s A-share markets (Shanghai and Shenzhen) were down 29% and 37%, respectively. Relevant to the Fund, China’s weight in the MSCI Emerging Markets Small Cap Index was nearly 16% versus about 17% for the Fund. The China component of the Index declined -19% for the 12 months ended December 31, 2018 compared to nearly
-18% for the Fund. China was one of the worst-performing countries in the MSCI Emerging Markets Index for 2018 with a loss of -18.5%. And with a weight of over 30%, China is the most-heavily weighted country in the Index. As a result, China may have a pivotal effect on the Index going forward. That is to say, China—if data and sentiment improve from here—can become a catalyst for broader emerging-market equity performance.

By contrast, the S&P BSE Sensex Index gained 5.91% in Indian rupees and only fell
-2.97% in U.S.-dollar terms, illustrating that India was one of the best-performing emerging markets in 2018. The support of Indian investors was a major factor. We increased our exposure to India throughout 2018, and the Fund was overweight in the country at about 30% of assets as of year-end. For the year, the Fund’s holdings in India were down -9.7% compared to the MSCI Emerging Markets Small Cap Index’s India component, which was down -26%. Part of our long-term attraction to the Indian market and one of the reasons India is the largest country weight in the Fund is the shift toward investing in financial assets by local investors and funds and away from property and gold. This is significant given that the savings rate in India is around 30%, which is high compared to 6% for U.S. savers. To illustrate the magnitude of the shift, in 2018 local equity funds bought around US$17 billion of Indian equities, more than offsetting the US$4.4 billion in sales by foreigners. Flows to financial assets grew more than 17% for the year over the same period a year ago. We expect this trend to continue.

Below is a chart highlighting net investment by foreign institutional investors over the five years ended December 31, 2018 compared to the performance of the S&P BSE Sensex Index over the same period. The chart shows that the S&P BSE Sensex Index rose (in Indian rupees) in 2018 despite net selling by foreigners.

BSE Sensex

Details of the Quarter and Year

India was the top contributor to the Fund’s performance relative to the MSCI Emerging Markets Small Cap Index for the fourth quarter and for the year. Bajaj Finance Ltd., Britannia Industries Ltd. and Berger Paints India Ltd. were among our best contributors for the quarter and year. Bajaj Finance is a non-bank financial company offering a broad spectrum of lending services. The company uses data analytics and information technology to offer low-cost financial services to its customers. Having declined during the third quarter, shares of Bajaj Finance rebounded on an easing of the interest-rate pressures that had threatened to increase its funding costs. Looking forward, we think the backing of Bajaj Group, the parent company, will provide Bajaj Finance with a key advantage over weaker competitors.

With a history of over 125 years, Britannia is a leading brand selling biscuits in India. The company’s strategy is to grow by selling related or complementary products such as breads, cakes, rusks (hard, dry biscuits or twice-baked bread) and dairy items, and by expanding into international markets. The company is also focusing on innovation and developing premium products. In 2018, we saw strong growth in the company’s existing product portfolio and it has developed a strong pipeline of products in newer categories such as dairy.

Berger Paints 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.

In contrast, China detracted from Fund performance for the quarter and year. The Fund’s weight in China was roughly equal to that of the benchmark, and our stocks underperformed. China Yongda Automobile Services Holdings Ltd. and MicroPort Scientific Corp. were notable detractors. China Yongda is an auto dealership based in Shanghai. BMW accounts for 40% of the company’s sales. In the first half of 2018, China Yongda’s net income fell due to tariffs and brand-specific issues. Given the lower margin and return nature of the business, it does not take much to disrupt the company. We are reviewing our positioning here. MicroPort Scientific manufactures interventional and minimally invasive devices for keyhole surgery. The company’s products are used to treat vascular diseases. MicroPort Scientific is also developing devices to treat diabetes and orthopedic diseases. The stock ended the year down about -25% after MicroPort announced that sales of orthopedic devices in the U.S. for the second half of the year would be below guidance. A hiccup in sales in the U.S. is not particularly concerning to us because we own the business for its potential, especially in cardiovascular devices, in China.

One of the Fund’s top contributors for the quarter and year was Vitasoy International Holdings Ltd. A Chinese company, Vitsasoy offers soy milk, tofu, rice milk, tea, juices and related food-and-beverage products in over 40 countries. Earnings per share rose 30% year-over-year in the company’s most-recent reporting period on 22% revenue growth. Management cited improved manufacturing efficiency and favorable trends in commodity prices, particularly sugar and milk powder.

While Brazil was a detractor from Fund performance for the fourth quarter and the full year, our top contributor for both time periods was a Brazilian holding. Magazine Luiza S.A. operates consumer-electronic stores in Brazil and has put in place strong information-technology infrastructure to make the business an e-commerce player using its stores as showrooms and mini-distribution centers. On the other hand, Raia Drogasil S.A. was the largest detractor from Fund performance for the year. Raia Drogasil operates the leading chain of drug stores in Brazil. The company has struggled with sluggishness in same-store sales as accelerated store additions from other chains increased competitive intensity.

Other country contributors for the fourth quarter and year included South Korea, South Africa and Thailand. In Korea, we were underweight and our stocks outperformed for the year, but slightly underperformed for the quarter. Medytox, Inc. contributed for both the quarter and year. Based in Korea, the company manufactures neurotoxins for cosmetic applications and the treatment of muscular disorders. Shares of Medytox rose after the company’s partner in a new drug moved forward with U.S. Food and Drug Administration Phase 3 testing. By filing the protocol necessary to advance the drug’s path to approval, the partner allayed concerns that it might abandon the drug. Additionally, Medytox reported strong operating results, especially compared to its main competitor.

Taiwan was the largest detractor from Fund performance for the year. Taiwan’s significant integration into China’s global supply chain hurt the stocks of Taiwanese companies, especially those in the semiconductor industry, over the course of the year as concerns about China’s economic growth moved to the forefront. Taiwanese IT company Silergy Corp., a manufacturer of high-performance mixed-signal and analog integrated circuits, was a significant detractor for the quarter and year. Silergy saw its stock price decline as a global shortage of passive electronic components impacted production of its products. We believe the shortage will be temporary and expect the company to ramp up production when components become more-readily available. We used recent weakness in the stock as an opportunity to add to the Fund’s position at prices we consider attractive.

Mexico was another detractor from performance for the quarter and year. We were overweight versus the benchmark in Mexico, and our stocks underperformed. Grupo Aeroportuario del Centro Norte S.A.B. de C.V., known as OMA, was the largest detractor from performance in the fourth quarter and also detracted for the year. The company operates a group of airports in Northern Mexico under a concession regime. The main airport in the group is in Monterrey, which is the third-largest city in Mexico and is a manufacturing hub. The rest of the business is spread around numerous small airports. Revenues are mainly driven by domestic travel. Tourist airports are inconsequential for this area. Mexican air travel is heavily under-penetrated even relative to other emerging markets with similar GDP-per-capita. The majority of Mexicans travel by luxury bus rather than by air. The company has seen passenger growth accelerating, and a new CFO is making a concerted cost-reduction push that should continue to benefit the company over time.

The stocks of OMA and other holders of government concessions in Mexico came under pressure earlier in the fourth quarter after a decision by newly elected president Andrés Manuel López Obrador to scrap a $13 billion airport under construction on the outskirts of Mexico City. The move spooked investors and weighed on the peso, which slipped
-4.3% against the dollar during the fourth quarter.

We think these worries are overblown and have found no evidence that Mr. Obrador plans to disrupt the existing concession system in Mexico. In what was widely viewed as a positive development, in mid-December a majority of bondholders accepted Mexico’s offer to buy back $1.8 billion in debt used to fund the airport’s construction. The peso rose on the news. Shares of OMA bounced back in December. (Current and future holdings are subject to risk.)


As we noted in this commentary for the fourth quarter of 2017, the information-technology (IT) sector has become a significant part of the MSCI Emerging Markets and MSCI Emerging Markets Small Cap indexes, while the role of natural resources in these benchmarks has declined. As of December 31, 2018, information technology was roughly 15% of the MSCI Emerging Markets Index and about 14% of the MSCI Emerging Markets Small Cap Index. Meanwhile, the metals and mining and paper and forest products industries accounted for just over 4% of these indexes. Outside of the dominant large-cap technology stocks (Tencent, Alibaba, Taiwan Semiconductor Manufacturing Corp. [TSMC] and Samsung Electronics Co. Ltd.††), there are not many emerging-market IT names. But the number of IT companies in emerging markets is growing due to the ability of technology and the internet to transform industries.  

For markets globally, technology had been the leading theme, receiving a growth premium. Now, with the retreat of technology stocks during 2018, we believe there is an unjustified discount for technology growth names. For example, Samsung trades at an estimated price-to-book multiple of 1.08 with a 12-month trailing price/earnings (P/E) ratio of 5.12. TSMC now offers a 3.55% dividend yield and has an estimated 2019 P/E of 16.35. The estimated P/E ratio for the MSCI World Information Technology Index is 14.53.

In looking ahead to 2019, there are some factors worth mentioning that may well support a turnaround in the performance of emerging markets, factors that hurt in 2018. Firstly, although the U.S. Federal Reserve (Fed) raised its benchmark interest rate four times in 2018, Fed officials signaled that their projections for economic growth and inflation in 2019 removed the urgency of repeated rate hikes. A slowdown in the Fed’s tightening cycle would be less supportive of the U.S. dollar and would make assets denominated in other currencies more attractive to investors. Secondly, some experts believe that the U.S. and China could reach a trade deal in the near future. Lastly, stock valuations in emerging markets have been driven down and look attractive, especially relative to developed markets.

Though uncomfortable, recent volatility in equity prices serves the larger and necessary purpose of wringing excesses in sentiment from global financial markets. In emerging markets especially, we believe valuations are nearing levels that bode quite well for future returns. Over time, we believe our active focus on high-quality companies has the potential to generate favorable investment results. In sum, we believe that the future for investing in emerging markets looks as attractive as ever.

We wish our shareholders a Happy New Year and appreciate the support shown through a difficult year.


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 December 31, 2018, the Wasatch Emerging Markets Small Cap Fund was not invested in Tencent Holdings Ltd., Alibaba Group Holding Ltd., Taiwan Semiconductor Manufacturing Corp. or Samsung Electronics Co. Ltd.

A bear market is generally defined as a drop of 20% or more in stock prices over at least a two-month period.

The S&P Bombay Stock Exchange Sensitive Index (S&P BSE SENSEX or simply the SENSEX) is a free-float market capitalization-weighted stock market index of 30 well-established and financially sound companies listed on BSE (Bombay Stock Exchange) Ltd. The 30 component companies, which are some of the largest and most actively traded stocks, are representative of various industrial sectors of the Indian economy.

Brexit is an abbreviation for “British exit,” which refers to the June 23, 2016 referendum whereby British citizens voted to exit the European Union. The referendum roiled global markets, including currencies, causing the British pound to fall to its lowest level in decades.

China A-shares, along with B-shares, are sold on mainland China’s two stock exchanges, which are in Shanghai and Shenzhen. The key difference between A-shares and B-shares is that A-shares are denominated in mainland China’s currency, the renminbi, and B-shares are denominated in foreign currency (U.S. dollars in Shanghai and Hong Kong dollars in Shenzhen).

CSI 300 Index consists of the 300 largest and most liquid A-share stocks. The Index aims to reflect the overall performance of China A-share market.

Dividend yield is a company’s annual dividend payment divided by its market capitalization, or the dividend per share divided by the price per share. For example, a company whose stock sells for $30 per share that pays an annual dividend of $3 per share has a dividend yield of 10%.

The MSCI Emerging Markets Currency Index sets the weights of each currency equal to the relevant country weight in the MSCI Emerging Markets Index.

The MSCI EAFE Index is an equity index which captures large- and mid-cap representation across 21 developed-market countries around the world, excluding the United States and Canada. With 920 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.

The MSCI Emerging Markets Large Cap Index includes large-cap representation across 24 emerging-market countries. With 750 constituents, the index covers approximately 70% of the free float-adjusted market capitalization in each country.

The MSCI World Information Technology Index is designed to capture the large- and mid-cap segments across 23 developed-market countries. All securities in the index are classified in the information-technology sector as per the Global Industry Classification Standard (GICS®).

The price/earnings (P/E) ratio, also known as the P/E multiple, is the price of a stock divided by its earnings per share.

A Purchasing Managers Index (PMI) is an indicator of the economic health of the manufacturing sector. The PMI is based on five major indicators—new orders, inventory levels, production, supplier deliveries, and the employment environment.

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

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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CFA® is a trademark owned by CFA Institute.