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

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Q3 2017
Emerging Markets Pared Gains After Signs of Life in the Dollar
by Ajay Krishnan, CFA, Roger Edgley, CFA and Scott Thomas, CFA

“For most of 2017, the sagging greenback had stoked investor demand for assets denominated in other currencies, contributing to a favorable investment environment in emerging markets.”

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For the period ended September 30, 2017, the total return of the Wasatch Emerging Markets Select Fund for 1-year, 3-year and since inception periods was 13.33%, 0.56%, and 1.03% respectively, the return for the MSCI Emerging Markets Index was 22.46%, 4.90%, and 3.29% respectively. Expense ratio: Gross 1.88% / 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.


Improving economic fundamentals across a number of developing countries helped push emerging-market equities solidly higher during the third quarter. The Wasatch Emerging Markets Select Fund—Investor Class gained 3.26% for the quarter. The Fund lagged its benchmark, the MSCI Emerging Markets Index, which rose 7.89%.

Stock prices in emerging markets pared stronger quarterly gains during the final two weeks of September, as a gauge of strength in the U.S. dollar against major rivals logged its first monthly increase since February. For most of 2017, the sagging greenback had stoked investor demand for assets denominated in other currencies, contributing to a favorable investment environment in emerging markets. The weak dollar also has loosened global financial conditions by making it easier for governments and companies outside the U.S. to issue securities.

Signs of life in the dollar appeared after the U.S. Federal Reserve (Fed) said it will begin normalizing its massive balance sheet in October. The move will essentially unwind quantitative easing—the monetary stimulus the Fed has provided since the global financial crisis. Because quantitative easing is considered responsible for fueling much of the post-crisis recovery in global equities, the announcement sparked concern among some investors about the possible impact on emerging markets.

India was the single-largest among several sources of underperformance. In response to weaker-than-expected GDP growth during the April-to-June quarter, the Indian government said it was considering measures to stimulate the economy. The announcement added to worries about rising fiscal deficits, spooking international investors and sending India’s currency and stock market lower. Given the Fund’s above-benchmark exposure to India and its higher weightings in Indian consumer and housing-related stocks, concerns of a prolonged economic slowdown in India impacted the Fund more than the Index.

Fund underperformance in Korea and Mexico was attributable to a combination of macro and company-specific factors. In both countries, our stocks declined as a group while their counterparts in the Index rose modestly.

Although the Fund’s Chinese stocks posted a double-digit gain, underexposure to large industrial firms expected to benefit from President Xi Jinping’s One Belt, One Road initiative hurt performance relative to the benchmark. In Brazil as well, the Fund’s gain fell short of its benchmark counterpart. The Brazilian stocks in the Index posted outsized returns during the quarter, as a $13 billion government-stimulus program boosted sales of appliances and other big-ticket items.

Details of the Quarter

The strongest contributor to Fund performance for the quarter was Bajaj Finance Ltd. An Indian non-bank financial company, Bajaj Finance offers a broad spectrum of lending services that include vehicle loans, mortgage loans, consumer loans and commercial loans. The company’s stock price soared to a 52-week high in September after its qualified institutional placement of equity shares was well-received by investors. Because Bajaj Finance can raise capital at prices well above its book value, its equity offerings generally are accretive to earnings. In the company’s most-recent quarter, profit after tax surged 42% compared to the same period a year ago.

Alibaba Group Holding Ltd. and Tencent Holdings Ltd. are considered by many to be China’s innovation engines. Alibaba is an online and mobile commerce company, while Tencent is an information-technology (IT) and media giant. International investors increasingly view these large Chinese companies as proxies for China’s growing middle class. As large-cap issues led China’s stock market higher during the third quarter, Alibaba and Tencent were the Fund’s second- and fourth-best contributors, respectively.

The third-best contributor was NMC Health plc, the largest private health-care provider in the United Arab Emirates (UAE). Health care has been an investment theme in the Fund, as emerging markets seek to build out their health-care infrastructure. NMC has been benefiting from new insurance rules that remove or reduce certain copayments and restrictions for holders of the UAE’s Thiqa medical-insurance card. Driven also by increased bed capacity obtained through a recent acquisition, earnings in the company’s most-recent quarter came in better than analysts had been expecting.

The greatest detractor from Fund performance for the quarter was BGF Retail Co. Ltd. The company operates convenience stores in Korea. Shares of BGF languished early in the quarter amid lingering concerns about the impact of the company’s proposed restructuring plan on existing shareholders. Later, geopolitical tensions, competitive pressures and regulatory worries weighed on the stock. In our analysis, however, the restructuring plan doesn’t materially change the underlying value of the business, and the short-term headwinds facing the company don’t significantly alter its long-term growth prospects. At its current stock price, we consider BGF attractively valued and one of the most appealing convenience-store growth stories in emerging markets.

China’s clampdown on tourism to Korea in retaliation for its deployment of the United States’ Terminal High Altitude Area Defense (THAAD) anti-missile defense system weighed on two of our other Korean holdings. Medical tourism from China has been a sales driver for Medytox, Inc., a Korean manufacturer of injectable neurotoxins for cosmetic applications. Likewise, LG Household & Health Care Ltd. is a Korean consumer-goods company with significant sales of cosmetics through duty-free shops. While Chinese tourism clearly has helped both companies, we view it as incidental to their growth trajectories and remain optimistic about both positions.

Another weak stock in the Fund was Promotora y Operadora de Infraestructura S.A.B. de C.V. (PINFRA). The company operates toll roads in Mexico under contracts with the government. Shares of PINFRA fell on news that the company had participated in an oil auction conducted by the Mexican National Hydrocarbons Commission. Although PINFRA bid for a small project and didn’t win, investors were concerned that the company had attempted to venture outside its core business of toll-road concessions. Subsequent statements from PINFRA management indicated that the company has no plans to enter the energy business. Our outlook for the company remains positive, and we believe the stock continues to represent a worthwhile holding for the Fund. (Current and future holdings are subject to risk.)


Much has been written about the likely implications for emerging markets as central banks in developed countries prepare to unwind their quantitative-easing programs. For our part, we expect any negative effects to be limited and short-lived. Current circumstances are very different from 2013, when the prospect of U.S. monetary tightening chased investors out of higher-yielding emerging-market currencies. Today, fiscal and current-account balances in most countries are stronger, foreign-exchange reserves are generally higher and investor sentiment is better.

The third-quarter gains in the Index and the Fund extend the advance in emerging-market equities that began in 2016. During the period from December 31, 2015 through September 30, 2017 the Fund returned approximately 24%, while the MSCI Emerging Markets Index climbed about 43% on a total-return basis. Despite its recent strong run, the Index has been essentially flat since its peak in the fall of 2007, and price-to-book ratios in most emerging markets remain below their long-term averages.

Moreover, greater than one-fourth of the 43% move in the Index over the past seven quarters was delivered by just four IT stocks with an average market capitalization of $334 billion. We believe large-cap outperformance on that scale is unsustainable, and future gains are likely to be more broadly based. With economic fundamentals in countries such as Mexico, India, Brazil and Russia stabilizing or improving, we think stocks of well-situated small and mid-size companies in emerging markets may begin to close the gap in recent performance compared to larger peers.

Thank you for the opportunity to manage your assets.


Ajay Krishnan, Roger Edgley and Scott Thomas


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.

Book value is the value of a security or asset as entered in a company’s books.

The global financial crisis, also known as the financial crisis of 2007-09 and 2008 financial crisis, is considered by many economists to have been the worst financial crisis since the Great Depression of the 1930s.

The price-to-book ratio is used to compare a company’s book value to its current market price.

Quantitative easing is a government monetary policy used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity.

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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