Wasatch Frontier Emerging Small Countries Fund® (WAFMX)  Invest in this Fund 

Investor Class | Institutional Class
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Q4 2017
Fund Ended 2017 With a Double-Digit Gain and Outperformed Its Benchmark for the Fourth Quarter
by Roger Edgley, CFA, Jared Whatcott, CFA and Scott Thomas, CFA

“While there are challenges and risks associated with frontier markets and emerging small countries—from tighter monetary policies in developed countries to rising valuations—we work hard to assemble a portfolio that has the potential to mitigate these risks while providing investors exposure to what we see as the best investment opportunities.”

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For the period ended December 31, 2017, the average annual total returns of the Wasatch Frontier Emerging Small Countries Fund for the 1-year, 5-year, and since inception periods were 21.16%, 2.52%, and 7.05%, and the return for the MSCI Frontier Emerging Markets Index were 26.79%, 3.99%, and 5.89%. Expense ratio: Gross 2.36% / Net 2.18%


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.


The Wasatch Frontier Emerging Small Countries Fund—Investor Class returned 6.18% for the quarter ended December 31, 2017 and outperformed the 5.04% return of its primary benchmark, the MSCI Frontier Emerging Markets Index, over the same period. For the 2017 calendar year, the Fund’s 21.16% return was the best annual performance since inception, though it did fail to match the benchmark’s 26.79% return.

Over the course of the year global equity markets, with few exceptions, saw synchronized global growth accelerate while countries generally avoided major geopolitical upheaval. This was the case in frontier and small emerging-market countries as well. Vietnam once again led the list of the Fund’s top-contributing countries, while most of the other markets in which we are invested, including the Philippines, Argentina and Peru, continued to enjoy tailwinds as well. Of the few markets that had negative performance within the benchmark, the most significant were Kuwait, where hydrocarbons account for nearly half of the country’s real gross domestic product (GDP), and Pakistan, where ongoing political and currency uncertainty continued to pressure equity prices.

Details of the Quarter

Our overweight in Vietnam was responsible for the Fund’s outperformance of the benchmark in this country during the fourth quarter. Although our stocks were up over 28%, they underperformed their benchmark counterparts in what was an extraordinarily strong market. In the last quarter of 2017, the Vietnam names in the benchmark raced ahead over 36% to multi-year highs, propelled by a strong macroeconomic backdrop, robust foreign direct investment, and supportive government policy. The country posted 7.65% GDP growth in 2017’s fourth quarter and was poised to achieve 6.81% overall GDP growth for year, higher than the government’s 6.7% target. Inflation continues to be healthy at 2.6% in November. We expect the environment to continue to benefit from rising discretionary income, strong consumption, a stable property market, reduction in bank provisioning, strong export growth, foreign direct investments inflows, and continued investments in energy and infrastructure projects.

We also have been seeing many interesting companies, both privately owned and state-owned, now being listed publicly in Vietnam. In fact, the number of listed companies has grown from 875 companies in 2011 to 1,422 in 2017, with more on the way. For example, we recently added Airports Corporation of Vietnam to the Fund as we believe this represents a unique asset in the frontier world—a monopoly operator in an underpenetrated market, where arrivals of international tourists continue to grow at a double-digit rate.

Vietnam Dairy Products JSC continues to be a core holding and epitomizes what we look for in a World’s Best Growth Company. Vietnam Dairy Products has continued to outperform both its industry and the Index. We believe this is due to the company’s world-class management team, immense headroom for growth, and stout product portfolio, where it continues to add premium products.

For the fourth quarter, the Fund’s biggest country contribution came from Argentina. The Fund’s holdings in Argentina gained over 15% and outperformed their benchmark counterparts by over nine percentage points. Argentina has continued on its path of accelerating GDP growth and finished the year with positive pension and tax reforms, but high inflation has also been persistent.

Transportadora de Gas del Sur S.A., the exclusive natural gas pipeline company for southern Argentina, continued to benefit from tariff reforms and expectations for higher production, and it was again a top 10 contributor to the Fund’s performance. But it was really the Fund’s financial holdings that drove our outsized return in Argentina. Like last quarter, banks Grupo Supervielle S.A. and Grupo Financiero Galicia S.A. were up strongly as expectations for continued macroeconomic normalization and lower inflation helped drive loan growth in a country where we see the banking system as having one of the biggest headroom opportunities in the world. Galicia is the largest domestically owned private bank in Argentina, with 9% market share of loans, 16% share of the credit-card market, and a strong franchise, which we expect to sustain its leadership position with increasing economies of scale. Grupo Supervielle has 2.8% market share in loans (which doubled in the last decade), and we expect the bank’s focus on lending to small and medium-size enterprises and consumers combined with its ability to improve efficiencies to provide substantially higher net-income growth than its peers.

Even though Kuwaiti stocks declined during the quarter, as previously mentioned, the Fund’s lower average weight in the country, which is less than half the Index’s 9% average weight, meant that Kuwait was a significant contributor to relative performance. Nevertheless, National Bank of Kuwait was the fourth-largest detractor from the Fund’s return.

Finally, South Africa, which is not represented in the Index, also contributed to the Fund’s outperformance of the benchmark during the fourth quarter. Both Naspers Ltd., a company that invests in internet and media holdings, and Transaction Capital Ltd., a specialty lender we added to the portfolio in November, were up over 20% during the quarter.

On a country basis, Pakistan was the largest detractor from the Fund’s performance versus the benchmark in the fourth quarter. Our substantially overweight position was mainly responsible, and our holdings in Pakistan underperformed those in the benchmark. Pharmaceutical companies Abbott Laboratories Pakistan Ltd. and Searle Company Ltd., and cement company DG Khan Cement Co. Ltd. were among the Fund’s largest detractors for the fourth quarter.  

Pakistan had its fair share of challenges in 2017, as we noted in our last quarterly commentary, yet things appear to be stabilizing. For starters, one source of concern to foreign investors had been the value of the Pakistani rupee, which many felt was overvalued and would need to depreciate, especially in light of the widening current-account deficit and pressure on foreign reserves. In December, the State Bank of Pakistan eased the managed float of the rupee and allowed it to depreciate to 110 rupees to one U.S. dollar from the previous exchange rate of 105 rupees per U.S. dollar. And while we see this as a good start, it is probably reasonable to expect further weakness in the rupee due to the country’s need to finance its twin deficits and its maturing debt.

The other concern for Pakistan has been that of political stability. Over the past few months, we saw stability improve as a new caretaker government stepped in, and former Prime Minister Nawaz Sharif nominated his younger brother Shehbaz to ascend to the prime spot within their political party, the Pakistan Muslim League-Nawaz (PML-N), thereby alleviating concerns of a drawn-out political tug-of-war. So while we still expect some volatility in Pakistan’s equity market going forward, we are also optimistic about the Fund’s investments in companies we consider to be high quality, especially given their now lower valuations. Compared to the MSCI Emerging Markets Asia Index, Pakistan was trading at roughly a 50% valuation discount as of December 31, 2017, compared to its 10-year historical discount of 25%.

Finally, Aramex PJSC (United Arab Emirates) was the Fund’s largest detractor for the three-month period. Aramex is the Middle East’s leading logistics-solutions provider with services including express shipping and freight forwarding. The company has an asset-light business model with diversified and growing revenue streams. Moreover, it has the potential to expand margins as its business mix changes to higher-margin courier segments. Aramex’s management team has proven itself capable of successfully acquiring other businesses in order to diversify the company’s product offerings. Growth has consistently been led by e-commerce, which is the main driver of its express and logistics business segments. Although Aramex detracted in the fourth quarter, we don’t believe that there are any fundamental issues. In its last reported quarter, revenues were up nearly 9% and earnings per share were up 20% year-over-year. Aramex continues to be one of the most interesting small-cap companies in the Middle East with ample runway for growth supported by its dominant status in the region and as a key beneficiary of growing e-commerce penetration. (Current and future holdings are subject to risk.)


The environment for frontier and emerging small countries continues to look encouraging for equity investing. Good economic trends in most countries, stable commodity prices, a weak U.S. dollar, and rising bond yields are all generally supportive. Nevertheless, given that equity valuations are also at multi-year highs, the companies held in the Fund will require strong earnings growth if they are to outperform. As we review each company in the Fund, we are cautiously optimistic. Our focus is on what we consider to be the highest-quality companies. We view these companies as having outstanding management teams, competitive advantages in the marketplace, and the ability to fund their own growth. We believe these factors provide them with the potential to succeed in a variety of market conditions.

Recent travel by members of our team to Pakistan and Bangladesh is a great example of the kind of research trip that has become a key part of our investment process at Wasatch. During the trip, we met with many of the management teams of companies in which we have invested to discuss their visions for the future. But our on-the-ground research did not end there. We also met with our companies’ competitors to gain a better understanding of how management’s strategies could impact market dynamics. We visited peer companies to get a more complete picture of the operating environment. And we also met with economic experts and government decision-makers to understand how the economic environment could impact our investments in those countries. This in-depth, bottom-up research is aimed at developing a complete view of each company, with all of its potential challenges and opportunities. And while there are numerous challenges and risks that may be concerning for investors in frontier and emerging small countries—everything from tighter monetary policy in the U.S. and Europe to valuations and geopolitical risks—we work hard every day to assemble the kind of portfolio that has the potential to mitigate these risks while providing investors exposure to what we see as the best investment opportunities in these markets.

Thank you for the opportunity to manage your assets.


Roger Edgley, Jared Whatcott and Scott Thomas


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

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 Frontier Emerging Small Countries Fund’s investment objective is long-term growth of capital.

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

Gross domestic product (GDP) is a basic measure of a country’s economic performance and is the market value of all final goods and services made within the borders of a country in a year.

The MSCI Emerging Markets Asia Index captures large- and mid-cap representation across nine emerging market countries. With 572 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.

Real gross domestic product (GDP) is a macroeconomic measure of the value of economic output adjusted for price changes (i.e., inflation or deflation). This adjustment transforms the money-value measure, nominal GDP, into an index for quantity of total output.

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

World’s Best Growth Companies are defined by Wasatch as companies that we believe possess an identifiable, sustainable competitive advantage, are well managed, underfollowed, undervalued and are producing above average earnings growth relative to their industry and country of origin.

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

You cannot invest directly in indexes.

View the Frontier Emerging Small Countries 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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