Wasatch Emerging Markets Select Fund® (WAESX)  Invest in this Fund 

Investor Class | Institutional Class
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Q2 2018
India Helped Provide Some Stability to the Fund During a Turbulent Quarter
by Ajay Krishnan, CFA, Roger Edgley, CFA, Scott Thomas, CFA and Matthew Dreith, CFA

“India’s expanding middle class and position as the world’s fastest-growing major economy underpinned support for Indian equities during a quarter in which concerns about international trade moved to the forefront.”

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For the period ended June 30, 2018, the total return of the Wasatch Emerging Markets Select Fund for 1-year, 5-year and since inception periods was 9.67%, 2.81%, and 1.99% respectively, the return for the MSCI Emerging Markets Index was 8.20%, 5.01%, and 2.89% respectively. Expense ratio: Gross 1.90% / Net 1.51%.


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.


During the second quarter, escalating fears of a global trade war dampened enthusiasm for emerging-market assets. The benchmark MSCI Emerging Markets Index fell -7.96% for the quarter. Liquidity concerns tied to the unwinding of monetary stimulus in the U.S., the European Union and Japan contributed to a general sense of cautiousness on the part of investors. The Wasatch Emerging Markets Select Fund—Investor Class declined less than its benchmark, posting a loss of -1.16%.

India was the Fund’s largest source of outperformance. As disruptions from the nationwide goods-and-services tax (GST) implemented last year continued to fade, our Indian stocks outpaced the Indian positions in the benchmark. The country’s expanding middle class and position as the world’s fastest-growing major economy underpinned support for Indian equities during a quarter in which concerns about international trade moved to the forefront. Investors reckoned that domestic consumption in India would more than offset the effects of higher oil prices, a weaker currency, and widening current-account and fiscal deficits.

South Korea was another source of strength against the benchmark, as easing geopolitical tensions in the region helped boost the Fund’s Korean holdings. The Fund’s recent gains in India and Korea followed significant underperformance in those countries during the second half of 2017. We remained patient in the belief that macro factors holding our companies back would prove temporary. Our patience has been rewarded so far this year, as improving business conditions drove upturns in the prices of the Fund’s Indian and Korean stocks.

Chinese stocks sold off and the yuan slumped on worries about China’s ability to wage a sustained trade war with the U.S. The second-quarter gain in the Fund’s Chinese holdings contributed to absolute performance and compared favorably with the decline in the Chinese component of the Index. Brazil and South Africa were among the Fund’s few sources of weakness relative to the benchmark.

Capital flight from emerging markets to safer havens forced central bankers in Indonesia, Mexico the Philippines, Turkey and other nations to hike interest rates in an effort to shore up their flagging currencies. Investors fretted that threatened tariffs in the U.S. and China might reduce global demand and impact countries dependent on exports. The Reserve Bank of India (RBI) raised its repurchase rate for the first time since 2014 in response to stronger economic growth and building inflationary pressures. RBI governor Dr. Urjit Patel called on the U.S. Federal Reserve to slow its pace of monetary tightening to help emerging economies cope with the fallout.

Details of the Quarter

The strongest contributor to Fund performance for the quarter was Bajaj Finance Ltd. An Indian non-bank financial company, Bajaj offers a broad spectrum of lending services. After-tax profit soared 60.5% year-over-year in the company’s most-recent quarter as improved asset quality led to lower loan-loss provisions. Revenue at Bajaj jumped 33.2%, and new loans rose 51% during the period. Assets under management increased 40%, driven by the consumer, rural and commercial segments. Management said it plans to increase the company’s footprint from 1,332 locations to 1,550 locations over the next 12 months.

BGF Retail Co. Ltd. was the second-best contributor. The company operates a franchise chain of convenience stores in Korea. BGF saw its stock price rise as Korean stocks gained favor with investors during the second quarter. Boosted by sales of tobacco and
e-cigarettes, same-store revenues showed modest improvement, while openings of new stores continued at a healthy clip. Longer term, the company’s solid offerings in the food category leave it well-positioned to benefit from ongoing consolidation in the industry.

Third-largest contributor Vitasoy International Holdings Ltd. is a Chinese holding in the consumer-staples sector. The company offers soy milk, tofu, rice milk, tea, juices and related food-and-beverage products in over 40 countries. Mainland China continued to drive strong top-line and bottom-line growth at Vitasoy in the company’s most-recent reporting period. Vitasoy’s gross margin widened as improved manufacturing efficiency offset higher prices for soybeans, sugar and other inputs.

The two greatest detractors from Fund performance for the quarter were the Brazilian holdings Raia Drogasil S.A. and M Dias Branco S.A., respectively. Both stocks tumbled amid broad weakness in Brazilian equities, which were the poorest performers in the Index during the second quarter. Factors weighing on Brazil’s stock market included a nationwide trucker strike and uncertainty ahead of the October presidential election. Brazil’s currency, the real, slid approximately -15% against the greenback, cutting the stock prices of Raia Drogasil and M Dias Branco in U.S. dollars.

Raia Drogasil operates a leading drug-store chain in Brazil. The company’s shares have languished this year amid decelerating top-line growth and disappointing same-store sales. We believe deterioration in these financial metrics is likely to be temporary, however. With Raia Drogasil continuing to gain market share and its long-term fundamentals attractive in our view, we added to the Fund’s position in the stock.

M Dias Branco sells wheat-derived foodstuffs, such as biscuits, pastas and wheat flour. It also offers margarines, crackers, cookies and cakes. Falling food prices and rising input costs have hurt the company’s revenues and profitability. Given the strength of M Dias Branco’s brands and our positive long-term outlook, we used recent weakness in the stock as an opportunity to purchase additional shares for the Fund.

The Fund’s third-largest detractor was Discovery Ltd. Based in South Africa, the company provides insurance products and services. South African equities tumbled during the second quarter as skittish international traders rushed to cut exposure to what they viewed as the riskiest emerging markets. Investors also feared that plans currently in the works to confiscate land in South Africa without compensation to the owners might deter much-needed investment. The rand fell approximately -14% against the U.S. dollar during the quarter. (Current and future holdings are subject to risk.)


The inclusion of China’s A-shares in MSCI market indexes on June 1st signified the progress China has made in opening its financial markets to global investors. At the same time, China’s increasing weight in the Fund’s benchmark reflects the country’s greater role on the world stage and in the global economy. China currently accounts for around 30% of the MSCI Emerging Markets Index, and that weighting is likely to increase further when the A-shares are fully loaded.

China’s expanded representation in the Index also reflects increased opportunities for investors willing to roll up their sleeves and put boots on the ground. Toward that end, we’re continuing our stepped-up efforts in China with another research trip planned for September or October. We’ll be focusing especially on areas that help China shift power away from foreign companies toward domestic industries.

Health care is one such area. The Chinese government has expressed a desire to become less dependent on imports of stents and other medical devices, for example, with self-sufficiency being the ultimate goal. We think the government’s push for domestic champions in health care is likely to drive sustained growth in the health-care sector. Already we are hearing anecdotal accounts of Chinese nationals trained in the West who are planning to return to China for the sole purpose of starting health-care companies.

The travel industry represents another area of opportunity in our view. As incomes in developing countries increase, we think a larger share of discretionary spending will be devoted to travel and tourism. Spending on tourism in China is already double that of the U.S.—even though only about 9% of Chinese citizens possess a passport. With international travel having been unavailable to China’s older generation under communism, the desire among China’s millennials to see the rest of the world is a theme we believe is likely to persist.

Despite the gloom of recent headlines, we believe emerging markets continue to offer some of the most-attractive valuations with the greatest headroom. While countries such as Turkey clearly remain in disarray from a macro standpoint, fundamentals elsewhere are much stronger than they were five years ago.

Thank you for the opportunity to manage your assets.


Ajay Krishnan, Roger Edgley, Scott Thomas and Matthew Dreith


The MSCI Emerging Markets Index is a free float-adjusted market capitalization index designed to measure the equity market performance of emerging markets. 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)

CFA® is a trademark owned by CFA Institute.

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

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).

The Shanghai Stock Exchange is the largest stock exchange in mainland China. It is a non-profit organization run by the China Securities Regulatory Commission (CSRC).

The Shenzhen Stock Exchange, based in Shenzhen, Guangdong, is one of China’s three stock exchanges. The other two are the Shanghai Stock Exchange and the Hong Kong Stock Exchange.

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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