Wasatch Global Opportunities Fund® (WAGOX)  Invest in this Fund 

Investor Class | Institutional Class
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Q3 2017
Japan Led Non-U.S. Developed Markets in the Third Quarter

“Japan: Land of Generational Change, a new white paper available on the Wasatch website, provides a comprehensive and insightful look at both the changes that have been taking place throughout Japan’s economy, and the opportunities that await knowledgeable investors.”

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For the period ended September 30, 2017, the average annual total returns of the Wasatch Global Opportunities Fund  for the one-, five-year and since inception periods were 16.61%, 10.48%, and 17.13%, and the returns for the MSCI AC World Small Cap Index were 19.23%, 11.94%, and 15.66%. Total Expense Ratio: 1.53%.


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While our investments in the United States and Japan demonstrated continued strength in the third quarter, our holdings in India pulled back when the Modi government initiated a goods-and-services tax, the latest effort in its program of regulatory and economic reforms. For the quarter ended September 30, 2017, the Wasatch Global Opportunities Fund—Investor Class returned 4.74%, while its benchmark, the MSCI All Country (AC) World Small Cap Index increased 6.17%.

We believe that disruptions to trade resulting from the implementation of India’s new tax will be short-lived and have no lasting effects on our holdings. To the contrary, we think this latest effort will be beneficial over the long term. Not quite a year ago, the government implemented a demonetization program that withdrew large-denomination bank notes from circulation. That act also resulted in short-term market volatility, but in our opinion has proven to be beneficial over time.

Among our holdings in emerging markets, Brazil was one of our strongest contributor to performance in the quarter, due mainly to a significant overweight relative to the benchmark that resulted in part from our investment in MercadoLibre, Inc. (MELI), which is absent from the Index. MercadoLibre is an online e-commerce company focused on Latin America. Originally a provider of auction-type platforms that connect buyers with sellers, MercadoLibre has been increasing its fulfillment capabilities. The company’s introduction of free shipping to customers in Brazil, Colombia and Chile caused earnings in its second quarter, reported in August, to fall short of expectations, sending the stock lower. Revenues, however, increased 58.5% over the same period a year ago. Moreover, the new strategy seems appropriate in our view, as it increases user satisfaction and business scale and strengthens barriers to entry for would-be competitors. MercadoLibre’s stock has since rebounded, making the company a significant contributor to third-quarter performance.

From a sector perspective, our investments in industrials and financials made the largest contributions to the Fund’s performance during the quarter, with both sectors outperforming the benchmark, driven by stock selection. The Fund’s holdings in the consumer-staples and real-estate sectors outperformed their benchmark counterparts by a wide margin. However, in the real-estate sector, the Fund’s significantly underweight position hurt performance relative to the Index. Having no exposure to the energy, telecommunication-services and utilities sectors caused the Fund to cede considerable ground to the benchmark, which benefited from a strong showing in all three sectors.

The information-technology (IT) sector is the Fund’s largest overweight relative to the benchmark. Our IT holdings detracted from relative performance during the quarter, but we believe this was likely due to transient, stock-specific factors and not due to decelerating growth prospects among our IT holdings. The Fund’s health-care sector is also overweight compared to its benchmark counterpart. While our health-care holdings underperformed during the quarter, we retain our generally positive view of their long-term growth prospects.

Details of the Quarter

The top contributor to the Fund’s third-quarter performance was Trex Co., Inc. (TREX), an industrial company that has been benefiting from growth in the housing market. The company has established leadership in composite decking, railing and other outdoor-living products. The firm’s current management team, we believe, is especially strong and able to take advantage of homeowners’ preference for the durability, maintenance and environmental benefits that composite products provide over their wood-based competitors. With mortgage rates continuing to support a favorable economic backdrop, we expect the company to maintain its strong growth rate and competitive advantage.

Envestnet, Inc. (ENV), a provider of a cloud-based suite of tools for investment professionals, was another strong contributor. Earlier this year, Envestnet’s shares sold off sharply when the company filed to delay its 2016 annual report, saying it had identified deficiencies that represented material weaknesses in its control over financial reporting. Investors have since calmed. Investors set aside their concerns in mid-August when the company’s second-quarter financial results showed that revenue had increased 18% in the quarter compared to the prior-year period and management was upbeat regarding growth expectations.

A pair of biotechnology companies, Sangamo Therapeutics, Inc. (SGMO) and Exact Sciences Corp. (EXAS) also contributed significantly to the Fund’s results for the third quarter. Sangamo’s share price soared in late August when one of its peers in cell therapy announced an acquisition that lifted both its price and those of related biotech companies. During the quarter, Sangamo also benefited from the company’s royalty agreement with Pfizer.†† In our view, this agreement emphasized to investors the strength and promise of Sangamo’s technologies. We believe a return of mergers-and-acquisitions activity among specialty pharmaceutical firms bodes well for Sangamo, as does cell therapy being increasingly seen as an established and accepted form of treatment.

Exact Sciences is a molecular-diagnostics company with an innovative test for colon cancer. Named Cologuard,® the test avoids the high cost and invasiveness of a colonoscopy by screening a stool sample for cancerous and precancerous cells. Shares of Exact Sciences began climbing in late April after accelerating demand for Cologuard produced better-than-expected revenues and earnings. The stock got another boost in late May when a major health insurer said it planned to cover the Cologuard test in a move expected to add about 30 million covered lives. Investors pushed Exact Sciences’ share price higher throughout the three-month period.

One of the largest detractors from performance in the quarter was Natco Pharma Ltd., a generic drug manufacturer. Natco’s unique strategy focuses on highly complex and difficult-to-manufacture generic drugs, which require higher investment and more time to approve. The potential returns are also much greater due to lack of competition. The company exceeded analysts’ expectations in the most-recent earnings report based on the continued strength of Tamiflu, but the stock was down as the company’s India business was weak due to temporary disruptions in trade amid the aforementioned implementation of the nationwide goods-and-services tax.

Another Indian holding, online travel company MakeMyTrip Ltd., was among the Fund’s top contributors in the first quarter of 2017, but its stock was volatile throughout the third quarter and ended the period sharply lower. We see continuing volatility in the stock as likely, but we maintain our optimism about MakeMyTrip’s ability to benefit from industry-consolidation trends.

Spirit Airlines, Inc. (SAVE) was another significant detractor in the third quarter. Spirit’s stock price tumbled near the end of July when the company’s latest financial results disappointed investors. Ongoing contract negotiations with its pilots also weighed on the stock. Given consumer demand for low-fare air service, we see strong growth potential for Spirit so long as its costs remain structurally low relative to the industry’s large players. We’re closely watching both industry dynamics and Spirit’s company-specific factors.

During the quarter, we added several new positions, including Monro, Inc. (MNRO) in the consumer-discretionary sector and GMO Payment Gateway, Inc. in Japan. Monro, formerly Monro Muffler Brake, Inc., contributed to performance for the quarter. We think the company is well-poised to strengthen its competitive advantages due to direct-sourcing of parts, industry-consolidation trends, and an aging economic cycle that means more car owners are reaching their likely “post-dealer” years of auto maintenance. We found an attractive entry point into GMO Payment Gateway. The Japanese IT company is a leading provider of credit card payment-processing and related services. We believe the growth prospects for GMO Payment Gateway look bright. (Current and future holdings are subject to risk.)


As the quarter drew to a close, Japanese Prime Minister Shinzo Abe called for a general election to be held on October 22nd. For years, many investors have avoided Japan and thus may have little interest in the outcome. But with our substantial commitment to Japanese equities—the country represents our largest non-U.S. allocation—we think the vote, which can be viewed as a referendum on Abenomics, is significant.

Abe is calling the election as a corruption scandal that flared earlier this year begins to recede from public consciousness and as tensions rise over North Korea. Viewed by many as a “tough guy,” Abe is virtually certain to win reelection. For investors, that will likely ensure the continuation of Abe’s economic framework known as “three arrows”—monetary easing, fiscal stimulus, and structural reforms to encourage growth along with proper oversight.

Prior to Abe’s reforms, Japan’s economy had been stagnating. Today, there are many indications that the country’s economy is improving. For example, Japan’s gross domestic product (GDP) has now expanded in the last six quarters, the longest sustained period of growth since before the global financial crisis. With unemployment at a multi-decade low of 2.8%, we’re starting to see modest wage inflation in some parts of the economy.

We think that much of the progress to date stems from the first two of Abe’s arrows, intended to fight deflation and provide an immediate boost to the economy. Only now are we beginning to see the effect of the third arrow, the structural reforms that he has encouraged to improve corporate governance, add independent directors, increase business competitiveness and productivity, and promote more mobility in the labor force. The result of these initiatives for us is that we’re starting to find more interesting and attractive investment opportunities.

Another factor contributing to our positive view is that Japanese companies are underfollowed: nearly half the listed companies in Japan have just two or fewer analysts researching them. With an investment approach that includes frequent company visits, we think we have an advantage over other investors. Japan’s small-cap market, one of the most vibrant to be found anywhere in the world, is another factor, contributing to the country’s reputation as a leading global innovator.

For a more in-depth look at Japan, and why we think the country offers investors significant growth opportunities, we suggest you take a look at a new white paper that Wasatch has published. Japan: Land of Generational Change, available on the Wasatch website, provides a comprehensive and insightful look at both the changes that have been taking place throughout Japan’s economy, and the opportunities that await knowledgeable investors.

Thank you for the opportunity to manage your assets.


JB Taylor and Ajay Krishnan



The MSCI AC World Small Cap Index is an unmanaged index and includes reinvestment of all dividends of issuers located in countries throughout the world representing developed and emerging markets. This index is a free float-adjusted market capitalization index designed to measure the performance of small capitalization securities. You cannot invest directly 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 Global Opportunities Fund’s investment objective is long-term growth of capital.

††As of September 30, 2017, the Wasatch Global Opportunities Fund was not invested in Pfizer Inc.

Abenomics refers to the economic policies advocated by Japanese prime minister Shinzo Abe after his December 2012 re-election to the post he last held in 2007. His aim was to revive the sluggish economy with “three arrows”—a massive fiscal stimulus, more aggressive monetary easing from the Bank of Japan, and structural reforms to boost Japan’s competitiveness.

The “cloud” is the internet. Cloud-computing is a model for delivering information-technology services in which resources are retrieved from the internet through web-based tools and applications, rather than from a direct connection to a server.

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.

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 AC World Small Cap Index is an unmanaged index and includes reinvestment of dividends of issuers located in countries throughout the world representing developed and emerging markets.


You cannot invest directly in indexes.

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CFA® is a trademark owned by CFA Institute.