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

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Q1 2018
Emerging-Market Equities Posted Minor Gains as Trade Worries Weighed
by Ajay Krishnan, CFA, Roger Edgley, CFA, Scott Thomas, CFA and Matthew Dreith, CFA

“Global financial markets remained volatile throughout most of the quarter, as heightened uncertainty kept investors on edge.”

Emerging India
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For the period ended March 31, 2018, the total return of the Wasatch Emerging Markets Select Fund for 1-year, 5-year and since inception periods was 22.17%, 1.67%, and 2.31% respectively, the return for the MSCI Emerging Markets Index was 24.93%, 4.99%, and 4.65% 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.


A global selloff triggered by prospects of a trade war rocked emerging-market equites during the first quarter. The benchmark MSCI Emerging Markets Index surrendered most of an early double-digit percentage gain to finish up 1.42% for the quarter. The Wasatch Emerging Markets Select Fund—Investor Class outperformed its benchmark, posting a return of 1.81%.

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.

Korea was the Fund’s greatest source of outperformance relative to the benchmark. Though Korean stocks were weak during the quarter, an outsized gain in a single stock enabled the Fund’s Korean holdings to generate a positive return as a group. Other countries of strength for the Fund included China and the United Arab Emirates. 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.

The Fund’s largest source of weakness against the benchmark was Brazil, where investors appeared to rotate away from the higher-quality companies we seek to own in the Fund. 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.

India, the most-heavily weighted country in the Fund, was among many poorly performing countries in the Index. However, the Fund’s Indian stocks declined significantly less than those in the Index, helping performance relative to the benchmark. 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. On the positive side, falling prices for crude oil and tomatoes helped push India’s inflation rate below 5% in February for the first time in three months.

Details of the Quarter

The strongest contributor to Fund performance for the quarter was Medytox, Inc. Based in Korea, the company manufactures injectable 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.

NMC Health plc was the second-best contributor. The company provides health-care services in the United Arab Emirates and other countries in the Middle East. NMC saw its stock price rise on news that the company had landed a contract to manage two hospitals in Egypt with a combined capacity of 860 beds. NMC also continued its planned expansion in Saudi Arabia as the Saudi government seeks to privatize the country’s health-care sector in the wake of lower oil revenues. We expect health care to remain a theme in the Fund as emerging-market countries seek to build out their health-care infrastructure.

Positive underlying fundamentals and healthy earnings growth helped our Chinese holdings outgain their counterparts in the benchmark during the first quarter. Top contributors included 51job, Inc., which was added to the Fund in February. 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. Adjusted net income climbed 48.4% year-over-year in 51job’s most-recent quarter on 25.6% revenue growth. The results exceeded expectations and sent the company’s stock price sharply higher.

The greatest detractor from Fund performance for the quarter was BGF Retail Co. Ltd. The company operates convenience stores in Korea. Shares of BGF declined on concerns about the impact of Korea’s recent increase in its minimum wage. The Moon Jae-in government raised the minimum wage by 16% on January 1st—the biggest increase in nearly two decades. While we think BGF may experience some short-term pressure on earnings as a result of the move, we believe it will improve the company’s long-term situation as weaker competitors are forced to consolidate or exit the business.

Raia Drogasil S.A., the second-largest 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.

Another weak stock in the Fund was Page Industries Ltd. The company makes and sells undergarments under the Jockey brand in India. We have no fundamental news to relate concerning Page and attribute the stock’s weakness to a general first-quarter malaise in Indian equities. We believe Page is a high-quality growth company well-positioned to benefit from rising discretionary spending among India’s growing population. (Current and future holdings are subject to risk.)


To the extent that global factors continue to create volatility for emerging-market equities, we expect the Fund’s relative performance to benefit from our greater emphasis on 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 the long-term potential of emerging markets.

While rising U.S. Treasury yields appear to have spooked world stock markets during the first quarter, the dynamics underlying the current interest-rate cycle are likely to be very different from those of the so-called “Taper Tantrum” of 2013. Of particular note is the U.S. dollar’s depreciation of -1.8% against a basket of rival currencies from early September of last year through March 31, 2018—even as the yield on the 10-year Treasury note rose from 2.06% to 2.74% over the same period. With interest rates stabilizing in Europe and already on the rise in China, a scenario in which rising rates in the U.S. significantly underpin the dollar seems much less likely this time around.

Several other factors also appear to be at play. We suspect the worsening U.S. fiscal situation—together with improving external balances in emerging markets—have given international investors less of a reason to fear a surge in the greenback. Additionally, the recent pickup in global growth has made it much more difficult for the U.S. to outgrow the rest of the world. Compared to the U.S. and other developed markets, the faster growth rates and more-attractive valuations of emerging markets should continue to merit favorable attention from investors in our view.

The Wasatch international team’s continued focus on China now includes the A-share market, which consists of the shares of approximately 1,400 companies incorporated in mainland China. Quoted in Chinese renminbi (RMB), A-shares are traded on China’s Shanghai or Shenzhen stock exchanges. Recent research efforts included a trip in which two of our team members were sent to visit companies in China and Taiwan. We expect our stepped-up research in China to result in a wider range of investment opportunities for the Fund.

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.

††As of March 31, 2018, the Wasatch Emerging Markets Select Fund was not invested in Allergan plc.

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).

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

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.

View the Emerging Markets Select 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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