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

Investor Class | Institutional Class
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Q1 2018
Research Trips to Vietnam and Egypt Uncover Exciting Possibilities
by Roger Edgley, CFA, Jared Whatcott, CFA and Scott Thomas, CFA

“During the quarter, we spent considerable time on the ground meeting companies in countries including Vietnam and Egypt. We believe these two countries are great examples of the attractiveness and opportunities of investing in frontier and smaller emerging markets, particularly when it comes to the degree of change and development that is rapidly taking place.”

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For the period ended March 31, 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 18.80%, 1.23%, and 7.05%, and the return for the MSCI Frontier Emerging Markets Index were 19.93%, 3.42%, and 5.92%. 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 1.71% and outperformed the 1.60% return of its benchmark, the MSCI Frontier Emerging Markets Index.

Over the past year in our quarterly commentaries, we have highlighted our increasing optimism regarding frontier markets and our conviction on frontier as an asset class. For the first quarter of 2018, frontier equity markets had a quarter of strong performance compared to their larger, more developed counterparts around the globe. Within the MSCI Frontier Emerging Markets Index, Vietnam, Kenya and Romania were among the frontier market leaders, with double-digit gains for the quarter. In addition, within the benchmark, the markets of Egypt and Nigeria, countries that recently had gone through significant currency and economic adjustments, continued to recover and produced gains for the three-month period. The Fund has no holdings in Nigeria and although its holdings in Egypt declined, we have grown increasingly positive on the country’s prospects.

During the quarter, we spent considerable time on the ground meeting companies in countries including Vietnam and Egypt. We believe these two countries are great examples of the attractiveness and opportunities of investing in frontier and smaller emerging markets, particularly when it comes to the degree of change and development that is rapidly taking place. We’ll discuss our findings on both of these countries later in the commentary.


Vietnam, one of our largest country exposures, was the top contributor to the Fund’s return for the quarter. However, we underperformed the benchmark in Vietnam as our overweight position was offset by the lagging performance of our holdings in a strong market.

We spent a considerable amount of time on the ground in Vietnam during the quarter and, despite seemingly rich valuations in some parts of the market, we came away with incrementally higher conviction in the country and in the prospects of its underlying companies. In our view, Vietnam epitomizes the attraction of investing in frontier markets.

From a top-down perspective, Vietnam has all the right ingredients—a stable political environment where the government has learned to release its tight rein on state-owned enterprises (SOEs) and instead focus on supporting the markets by pushing for privatizing businesses, improving corporate governance, opening trade and deregulating industries, among other initiatives. A number of Vietnam’s markets are underpenetrated, providing excellent headroom for companies to grow. For example, there is only 30% market penetration in banking and less than 10% in modern retail. Just 34% of Vietnam’s population lives in urban areas, and the population is young by developed-market standards, providing huge potential for future gains in productivity. Gross domestic product (GDP)-per-capita has been increasing at an annual rate of 6% over the past five years. Vietnam’s GDP-per-capita, now at $2,385, is getting close to the important $3,000 per-capita level. Research of other developing countries has shown that when a country’s GDP-per-capita reaches this point consumer demand often explodes, leading to accelerated development of industries such as retail, automotive and real estate.

Foreign direct investment has also been accelerating, increasing 10% in 2017 to reach an all-time high of $17.5 billion U.S. dollars, or 8% of Vietnam’s GDP, significantly higher as a proportion of GDP compared to peer countries. The country has become a manufacturing hub for companies like Samsung, which has its largest factory in Vietnam and is planning to invest another $2.5 billion U.S. dollars into the country.

Vietnam’s capital markets have also improved in breadth and depth—the number of listed companies has grown 70% over the last five years, reaching $155 billion U.S. dollars in total market capitalization in 2017 (70% of GDP versus 24% of GDP in 2012). As a result, the stock market’s liquidity has improved with average daily trading volume increasing from $50 million U.S. dollars in 2012 to $330 million U.S. dollars today, surpassing the Philippines for example. The quality of investable companies has also been improving across various sectors from consumer to financials. We believe these strong fundamentals support Vietnam to continue on its current positive trajectory.

One of the Fund’s largest contributors for the quarter was Ho Chi Minh City Development Joint Stock Commercial Bank (HD Bank), an up-and-coming private bank focused on the rapidly developing and underbanked small and medium-sized enterprises and retail segments of Vietnam. HD Bank is largely devoid of the corporate legacy exposures and capital constraints that have been limiting the ability of many SOE banks to grow. As a result, we see HD Bank as being well-positioned to take advantage of the growth opportunity presented by an underbanked population.

Phu Nhuan Jewelry JSC, another top contributor for the quarter, is a good example of a dominant company operating in an underpenetrated market. In our opinion, Phu Nhuan has a good management team that has been acting upon the opportunity. The company has been increasing the number of its jewelry stores at an annual rate of 15%, while still achieving double-digit same-store-sales growth. Phu Nhuan’s store network is now four times bigger than the nearest competitor. At the same time, management has been investing in technology and inventory-management software, allowing Phu Nhuan to stay ahead of its competitors.

Aside from the strong contribution of our Vietnamese holdings, NMC Health plc, a United Arab Emirates (UAE)-based hospital operator, continued its strong performance, ending the quarter as the Fund’s top-contributing holding. The company recently reported revenue growth of over 31% for 2017, and the number of patients served grew 34%. The company also recently entered Saudi Arabia—a much larger market of 30 million people that has been chronically underserved in specialized health-care services. Within the UAE, NMC Health has spent the past few years building out its hospital network, and we’re now beginning to see those efforts bear fruit.

Second-largest contributor Safaricom plc has been a long-time core holding of the Fund. Despite the macro challenges in Kenya, the company has continued to grow at a double-digit rate, leveraging its wide telecom-infrastructure network and its M-Pesa mobile-payment system, which now contributes 26% of Safaricom’s total revenues.

We visited Egypt at the start of the year to assess opportunities and more closely examine the underlying economic environment following the devaluation of the Egyptian pound in late 2016. Having visited the country multiple times over the past several years, we came away the most optimistic yet on the country’s outlook and have been increasing our exposure.

Egypt is a positive example of a developing market that has undertaken structural reforms and taken decisive policy actions to fix the country’s structural deficiencies and create a more balanced and sustainable economy.

After a 60% currency devaluation in November 2016, and inflation spiking to over 30% the following year, Egypt appears to have reached a turning point, and looks poised for a multi-year recovery—inflation is easing, real interest rates are now positive and the Egyptian Central Bank has begun reducing policy rates. What’s more, the country’s fiscal and current-account deficits have dramatically improved, tourism appears to be recovering, natural-gas discoveries are eliminating external dependencies, and consumption is finally picking up. Most importantly, the Egyptian pound, after the dramatic devaluation and the central bank’s fully floating foreign exchange policy, appears to be inexpensive and is even expected to appreciate this year.

Similar to Argentina, if Egypt’s policymakers can fix the country’s structural issues, we believe the upside potential is enormous. What has always made Egypt so attractive to us is the potential headroom for economic growth and development. Supporting factors include a large population of close to 100 million people, young demographics, low-cost labor advantage, fairly skilled labor force, and an extremely underbanked informal economy.

Historically, Egypt’s economy had major structural deficiencies and had been trapped in a vicious cycle of inflation, large fiscal deficits and a persistent trade deficit, leading to a major episode of currency devaluation roughly every seven years. Then throw in a revolution, failed democracy, religious strife and a military takeover, and you had a potent cocktail for a nearly failed state.

After the Egyptian army ousted democratically elected President Mohammed Morsi and the military took over in 2013, Egypt was faced with an overvalued currency, severe budget deficit, a weak trade deficit, capacity shutdown and a major lack of infrastructure and energy-generation capacity. After consolidating power, the military leadership undertook severe policy measures to fix the issues and get the country up and running again.

The Egyptian Central Bank’s foreign exchange policy changed from the currency being fixed and managed prior to the November 2016 currency devaluation to fully floating afterward in order to begin clearing the buildup in balance of payments. Fiscal consolidation was a big push and, as part of a loan agreement with the International Monetary Fund, Egypt began to increase fuel prices and decrease costly subsidies that had been a significant drag on the country’s fiscal balance (as high as 7% of GDP), wages were cut, and a value-added tax (VAT) was implemented among other initiatives. Additionally, investment and incentive structures were set up to develop four key strategic areas of the economy—petrochemicals, textiles, construction materials and export trade—particularly export-oriented or import-substitution industries.

As a result of the devaluation, consumers’ purchasing power was decimated as inflation spiked to over 30%. While steps were taken to shield the lower-income segment of the population, inflation hit the middle class particularly hard. The situation seems to have turned the corner in late 2017 with a more positive outlook. Inflation has been easing from a peak of nearly 35% in 2016 to 13.3% as of March 2018.

Tourism, which had suffered due to unrest within the country, is recovering. According to government sources, Egypt’s tourism revenue soared nearly 124% and the number of tourists increased 54% in 2017 versus the same period a year ago. Moreover, the recovery has been without Russian tourists (historically accounting for roughly a third of traffic), but in January 2018 Russian President Vladimir Putin approved resuming flights from Moscow to Cairo in February following a two-year ban. This adds to the scope for improving trends to continue.

In our view, there are a couple of key risks to consider going forward. First, although higher oil prices are less of a government-budget issue with subsidies nearly removed and they are being offset by better tax collection and some expense rationalization, higher fuel prices flow directly through to inflation and consumer demand. Second, is the risk to the budget due to high debt service, although this seems to have turned the corner with inflation falling and interest rates starting to come down.

During our trip, we had the chance to meet with executives of Ibnsina Pharma, a pharmaceutical-distribution business. The company is managed by two brothers, who are deeply passionate about the business and have successfully grown the company to be the number-two player in the market over a short period of time. Supported by the double-digit growth of the pharmaceutical industry in Egypt, we believe Ibnsina can grow even faster. The company was recently listed and has raised equity to continue to build out its distribution facilities. We added a position in Ibnsina Pharma during the quarter.

Cleopatra Hospital, another Fund holding based in Egypt, reminds us of an early version of NMC Health, mentioned earlier. Given Egypt’s demographics and patients’ need for hospital services, we believe Cleopatra has a long runway for growth. The company is building out Egypt’s first private-hospital network. In addition to strong organic growth, the company has been able to successfully acquire hospitals at lower prices, and turn them around to increased profitability. During the first quarter, the company’s share price took a bit of a wobble following a potential acquisition delay of a target hospital, making Cleopatra one of the Fund’s largest detractors from performance. Given the company’s track record, capacity for growth, and strong management execution, we believe this could be an opportunity to increase the size of our position.

The Philippines was the largest country detractor from the Fund’s return in the quarter. However, relative to the Index, it was our largest contributor on a country basis. This was due to the Fund having an underweight position in a weak market and because our stocks outperformed those in the Index. After hitting an all-time high in January, the Philippines market saw a wave of selling by foreigners, and ended the quarter down nearly 12%. In what has historically been a fairly strong currency by emerging-market standards, the Philippine peso depreciated about 4% relative to the U.S. dollar during the quarter. While domestic demand has been robust on the back of fiscal stimulus, rising inflation coupled with a deteriorating current-account balance and higher U.S. interest rates have put downward pressure on the peso. On March 22, 2018, the Philippine central bank held its benchmark interest rate at 3%, but many economists believe the central bank has fallen behind the curve, and may need to raise its benchmark rate in order to keep the economy from overheating, avert further currency pressure and bring foreigners back to the market.

Ayala Corp., one of the strongest conglomerates in the Philippines, followed the broad underperformance of the country and detracted from the Fund’s performance for the quarter. The company has embarked upon steps to further develop its recurring revenue stream with good results from its energy investments. Despite the company’s fundamental strength, however, the stock was impacted by selling from foreign institutional investors, led largely by Mitsubishi Corp. of Japan reducing its stake in the company from 10% to 9% as part of its portfolio rebalancing and not on business concerns.

BDO Unibank, Inc., the dominant bank in the Philippines in terms of assets and deposits, and SM Prime Holdings, Inc., the leading commercial and residential real-estate developer, were also among the Fund’s laggards for the quarter. BDO has built the largest retail network of any bank in the country, and with net interest margin compression stabilizing, we believe the company is poised to benefit from these efforts. BDO and SM Prime are owned by SM Investments Corp. and benefit from its large retail and commercial ecosystem. Given strong earnings growth in both BDO and SM Prime, we witnessed valuations becoming quite stretched and then sharply correcting. Fundamentally, however, our research indicates that both businesses remain on stable footing. (Current and future holdings are subject to risk.)


Wasatch is increasingly optimistic regarding the outlook for many of the frontier and emerging small countries where we see improving macro conditions after a multi-year period of difficult adjustments. As we’ve discussed in past commentaries, the major externalities that had been overwhelming many of these markets such as the strong U.S. dollar, weakening commodity prices and external imbalances have largely turned neutral to positive. 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. Most importantly, we have seen significant improvement in the outlook for our portfolio companies and we are starting to see a rebound in earnings growth. Accelerating growth, reasonable valuations and low correlations with more developed global markets continue to give us confidence in the Fund’s holdings.

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.

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.

Correlation, in the financial world, is a statistical measure of how asset classes, securities, markets, or countries move in relation to each other.

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.

GDP-per-capita is a measure of the total output of a country that takes the GDP and divides it by the number of people in the country.

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.

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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