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

Investor Class | Institutional Class
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Frontier and Emerging Markets Witnessed Historic Volatility as Trade Tensions Mounted
by Roger Edgley, CFA, Jared Whatcott, CFA and Scott Thomas, CFA

“As bottom-up stock pickers we find comfort in the fact that the companies in which the Fund has invested are robust and continue to see strong demand for their products and services from their home markets. As such, they are far more resilient and less likely to be affected by global trade concerns.”

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For the period ended September 30, 2018, the average annual total returns of the Wasatch Frontier Emerging Small Countries Fund for the 1-year, 5-year, and since inception periods were -8.73%, -2.86%, and 3.85%, and the return for the MSCI Frontier Emerging Markets Index were -6.57%, 1.04%, and 3.38%. 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 MSCI Frontier Emerging Markets Index lost -1.60% for the three months ended September 30, 2018, while the Wasatch Frontier Emerging Small Countries Fund—Investor Class declined -1.95%.

Emerging and frontier markets witnessed historic volatility over the past 12 months brought on by a cascade of factors. In particular, emerging- and frontier-market investors have become concerned over the impact of a rising U.S. dollar, the prospect of a trade war as tensions between the U.S. and China over tariffs continued to mount, and the more hawkish tone of U.S. Federal Reserve officials when discussing the strength of the U.S. economy as they continued gradually raising short-term interest rates. These fears then found some life when Argentina experienced a severe currency devaluation for which it now relies on a bailout from the International Monetary Fund (IMF), and as Turkey continued to battle with its own currency woes. The combination of these factors, their relative severity, and their occurrence in such a short period of time has exposed countries that are the most vulnerable and has generally led to a “risk off” environment with many global investors reducing exposure to the frontier asset class.  While much of the pain was taken in the second quarter, and valuations in frontier and emerging markets are becoming increasingly more attractive, the current miasma has left markets somewhat rudderless for the time being.

As bottom-up stock pickers we find comfort in the fact that the companies in which the Fund has invested are robust and continue to see strong demand for their products and services from their home markets. As such, they are far more resilient and less likely to be affected by global trade concerns.

While for the 12 months ended September 30, 2018 Argentina was the worst performer within the MSCI Frontier Emerging Markets Index (as discussed in previous commentaries), the country is now showing some signs of improvement and stability. During the quarter, President Mauricio Macri’s government reached an agreement with the IMF for additional financing that should help stabilize the currency and tackle inflation. The Macri government also embarked upon aggressive measures including raising interest rates to 60%, establishing an intervention band for the peso, and replacing shorter-term debt instruments with longer-duration ones. In short, Argentina’s government is following the neo-liberal economics playbook for currency and inflation stabilization. Overall, Argentinian stocks in the benchmark and the Fund were down roughly -10%.

Egypt struggled this quarter and was down nearly -7% in the benchmark. The Fund’s holdings underperformed, declining nearly -13%. Egypt’s stock market touched its lowest point for the year during the quarter with a widespread market selloff triggered by an insider trading scandal at two of the country’s largest trading firms. This was further exacerbated by fears of an emerging markets contagion—which in our opinion seemed misplaced—triggered by the deterioration in Argentina and Turkey during the year. Despite the poor overall performance of the Egyptian stock market, our core holdings in Egypt are dominant players in their respective industries and each of our holdings have been producing strong growth.

While Egypt detracted from the Fund’s performance in the quarter, Kuwait and Saudi Arabia contributed to the Fund’s third-quarter return. In large part, Saudi Arabia and Kuwait—members of the Gulf Cooperation Council—tend to be somewhat immune to wider fears of emerging-markets contagion given their relatively more insular economies and, with currencies pegged to the U.S. dollar, they are supported by stable oil exports and increasing oil prices. The National Bank of Kuwait SAK, our largest holding in Kuwait and one of the Fund’s largest holdings overall, returned 10% in the quarter aided by annual earnings growth of 16% for its most-recent quarter.

Kenya was one of the weakest markets during the quarter with the benchmark’s Kenya position down -13.2%. The dramatic underperformance in Kenya was due to a variety of factors. First, investors expected the removal of a rate cap on banks, which has not happened. Second, higher oil prices negatively impacted the country’s current-account deficit. Third, there’s been a delay in public infrastructure spending. And fourth, regulatory attention continued to focus on Safaricom. As a result, investor confidence in Kenya appears to have been temporarily shaken. Our only holding in the country is Safaricom plc, the dominant telecommunications and mobile-payments company in Kenya. Although Safaricom was a detractor for the quarter, it remains a powerful cash flow generator. Given its dominance and secular growth, we believe Safaricom is one of the most unique and profitable telecommunications companies within broader frontier and emerging markets. 

The single largest contributor to performance in the quarter was ASA International Group plc, a leading micro-finance lender with operations spanning Asia and Africa. The company had its initial public offering earlier this year. The company spun out of ASA, non-governmental organization (NGO) based in Bangladesh that is a pioneer in the realm of micro-finance lending to individual female entrepreneurs. ASA’s model was widely adopted across India where it has created more than a few multi-billion dollar businesses. As investors with a long track record in India, and familiarity with this business model, we quickly recognized that ASA International had the right ingredients for success. The company operates in a variety of key geographies that we believe give it exposure to the right customer profiles and help mitigate geographic concentration risk.

The stock price of Srisawad Corp. Public Co. Ltd., a non-bank financial company in Thailand, gained over 67% for the quarter, making it the Fund’s second-best contributor to performance. The strong performance of the company in the third quarter was a function of management addressing Srisawad’s relatively poor first quarter which showed a temporary spike in non-performing loans and lower net interest margins. Oftentimes quarters can be quite noisy and can be a function of timing mismatches. In the case of Srisawad, this is what took place in the first half of 2018. The company’s results for the second quarter saw meaningful improvement in both areas of concern, and we anticipate continued improvement throughout the remainder of the year.

FPT Corp., a Vietnamese information-technology company, continued its strong growth and was up nearly 15% for the quarter, driven by its software outsourcing segment. FPT has now developed capabilities to do higher value outsourcing including artificial intelligence (AI), the Internet of Things (IoT), cloud and digital transformation. As demand for IT outsourcing grows, FPT has cost advantage relative to Indian and Chinese peers given that it can find engineers and developers at 80% of the cost of those in China or India.

The Fund’s largest third-quarter detractor was Philippine Seven Corp., the 7-Eleven master franchisee in the Philippines. Local funds bid the stock up quite aggressively at the end of the second quarter. It then retraced its performance in the third quarter with a decline of over 30%. We believe the long-term health of the company is intact. Operationally, Philippine Seven continues to dominate the convenience store segment in the Philippines and so far this year the company’s growth has been accelerating.

Although the Egyptian equity markets were in a downswing during the third quarter, our holdings continued to grow despite weakness in their stock prices. An example is Ibnsina Pharma S.A.E., one of Egypt’s largest listed pharmaceutical distributors. The company increased revenues 42% over the same period a year ago, and margin expansion led to 56% growth in operating income in the last reported quarter. Despite this strong growth, Ibnsina has struggled as the company fights a lawsuit brought by an Egyptian regulator. The company has already made provisions in its budget for a potential fine, which gives us some comfort that even a potential worst-case scenario has already been taken into account. The overhang of the lawsuit has continued to weigh on stock-price performance and Ibnsina detracted from the Fund’s performance for the quarter.

Cleopatra Hospital and Commercial International Bank (CIB) were also among the Fund’s holdings in Egypt that detracted from performance. In its most-recent financial report, Cleopatra Hospital, an Egypt-based hospital operator, grew operating income by 103% from the year ago period. The most-recent quarterly report for CIB, the largest private bank in Egypt and a longtime holding for the Fund, showed loan growth of 15% over the same period a year ago, which contributed to net income growth of over 30%.

Among emerging markets, Egypt appears to be a case of investors throwing the baby out with the bathwater. Although the turbulence in emerging markets has made investing in Egypt more challenging, close interaction with the management teams of our Egyptian holdings, gives us confidence that growth can be found in the Arab world’s most populous country by investors willing to roll up their shirtsleeves and dig to unearth companies with characteristics that support their ability to grow in spite of what’s happening in the broader emerging-markets universe. (Current and future holdings are subject to risk.)


While we have seen significant volatility across a number of frontier and emerging markets this year, we still believe in the long-term fundamentals of frontier and emerging small countries and in the quality of the companies held in the Fund. While specific externalities have been overwhelming many of these markets this year such as the strong U.S. dollar, others such as weakening commodity prices and external imbalances have largely turned neutral to positive in many of the markets. Many frontier and small emerging-market countries have addressed and taken steps to repair structural issues, which has created a more stable and positive growth outlook. What’s more, domestic demand seems to have troughed and many economies appear poised for a continued cyclical recovery. We believe that the difficult adjustments many frontier and emerging small countries have been making and will continue to make will allow macroeconomic stability to continue to improve. With pullbacks in a number of markets, stock valuations are now even more attractive.

It is also worth reminding shareholders that as the emerging-markets universe improves and strengthens, frontier markets should also benefit. We believe that by continually striving to position the Fund in what we regard as the highest-quality companies across frontier and emerging small countries, we provide the Fund with the best chance of reaping the potential long-term rewards.

We believe that bottom-up analysis and travel to the regions in which we invest are critical, as economic growth, political structures and willingness to reform vary widely in developing markets. We continue to travel extensively and are excited about the future of frontier and emerging small countries and their expanding role in the global economy.

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.

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.

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

An initial public offering (IPO) is a company’s first sale of stock to the public.

The International Monetary Fund (IMF) is an international organization established in 1945 that aims to promote international trade and monetary cooperation, and stabilization of the world’s currencies. The IMF maintains a monetary pool from which member nations can draw in order to correct a deficit in their balance of payments. It is a specialized agency of the United Nations.

“Risk-off” is when investors become more cautious and take money out of the market, not being willing to risk it, thus risk off.

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

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.

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