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

Investor Class | Institutional Class
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Q2 2018
U.S. Stocks Continued to Advance and Added to the Fund’s Return

“U.S. companies dominated the contributors to the Fund’s performance during the second quarter, accounting for eight of the top 10.”

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For the period ended June 30, 2018, the average annual total returns of the Wasatch Global Opportunities Fund  for the one-year, five-year and since inception periods were 22.14%, 11.16%, and 17.56%, and the returns for the MSCI AC World Small Cap Index were 13.83%, 10.80%, and 15.19%. Total Expense Ratio: 1.59%.

 

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.

Overview

The second quarter opened on a down note for growth investors as lower-quality companies advanced broadly. Beaten up in the volatile closing period of the first quarter, lower-quality issues in the early part of the second quarter recovered sharply, leading some investors to become concerned that the strong run that high-quality growth stocks had enjoyed since early last year was nearing an end.

However, high-quality growth stocks began their resurgence in May, quelling that concern and contributing to gains throughout the remainder of the second quarter, enabling the Wasatch Global Opportunities Fund—Investor Class to gain 1.54% for the three months ended June 30, 2018. The Fund’s benchmark, the MSCI ACW (All Country World) Small Cap Index, rose 1.94%.

The United States and Japan accounted for significant contributions to Fund performance. Developed markets have generally continued to advance, but the synchronized global economic expansion that characterized much of the past several quarters has experienced what we think will prove to be a temporary hiccup.

While our specific holdings in China performed well during the second quarter, emerging markets faltered overall. Seeking relative safety, many investors shifted their focus to developed markets—especially to the U.S., where the economy appeared to strengthen during the quarter. In June, as the Federal Open Market Committee raised interest rates for the second time this year, Federal Reserve Chairman Jerome Powell said U.S. economic growth looked sufficiently robust to support continued normalization of monetary policy.

Our holdings in Australia (albeit at a small weight) and Japan outperformed their benchmark counterparts. Overall, the Japanese economy has continued to improve. Interest rates have remained low and, recently, we’ve started to see a modest level of wage inflation that bodes well for continued growth. Another positive has been that unlike several other global markets—notably Canada, China and Europe—upon which the U.S. administration has imposed tariffs, Japan’s trading arrangements with the U.S. have thus far remained intact. Of additional benefit to the Fund, our companies in Japan are largely domestic facing, meaning they primarily serve Japanese customers, providing an even greater degree of insulation from the mounting trade imbroglio.

Thailand, Brazil, India and Mexico were among the emerging-market countries that recently experienced difficulty. These countries were the largest detractors from Fund performance during the quarter.

Our health-care, information-technology (IT) and consumer-discretionary names contributed significantly to the Fund’s return for the quarter and outperformed their benchmark peers. A large overweight—more than double the Index weight—mainly accounted for the Fund’s performance contribution from health care, while favorable stock selection propelled the contributions from the IT and consumer-discretionary sectors. The financials sector was the largest source of weakness against the benchmark, as several of the Fund’s financial holdings suffered sharp declines.

It’s undeniable that much of the daily news cycle during the second quarter centered on politics, both domestic and global. The imposition of tariffs and an unexpected meeting in Singapore between North Korean Supreme Leader Kim Jong-un and U.S. President Donald Trump dominated the headlines. That said, we cannot emphasize enough that the political climate is not our focus. As we have communicated many times before, we continue to concentrate on identifying high-quality companies with strong growth prospects.

Details of the Quarter

U.S. companies dominated the contributors to the Fund’s performance during the second quarter, accounting for eight of the Fund’s top 10. And U.S. health-care companies accounted for three of the Fund’s top five contributors.

Ensign Group, Inc. (ENSG), a health-care facilities company, saw its stock price advance as investors responded to improvements in business fundamentals. Ensign’s stock price has been inexpensive relative to others in its industry, which likely gave the price more room to bounce higher. As we’ve written before, we continue to have confidence in the ability of Ensign’s management team to work through some recent bumps in the road relating to facilities acquisitions.

HealthEquity, Inc. (HQY) is a U.S.-based company providing an online platform to manage Health Savings Accounts (HSAs), Health Reimbursement Arrangements, Flexible Spending Accounts and similar health-care-related accounts. HealthEquity’s stock has been on a rather volatile trajectory so far this year, as investors have been wary of an industry slowdown. But the stock ended the quarter up about 24%. In its most-recent quarter, HealthEquity reported revenue growth of 26% over the same quarter last year and the total number of HSAs served reached 3.5 million, an increase of 24% over the same end point in 2017. We remain enthusiastic about the company’s prospects given the fast growth of the HSA market.

Exact Sciences Corp. (EXAS), developer of the innovative colon-cancer screening test Cologuard,® was another major contributor with the stock up about 48%. The company’s most-recent quarterly report featured an 87% increase in sales from the same period a year ago. Additionally, the company processed 186,000 more Cologuard tests during the quarter, an 87% increase over the same period in 2017. And 9,000 more health-care providers began prescribing the test. The company’s share price also benefited in May when thhe American Cancer Society recommended that colon-cancer screening begin at age 45.

MonotaRO Co. Ltd. was one of two Japanese companies among the Fund’s top 10 contributors in the second quarter. An industrial distributor of maintenance, repair and operations products serving domestic needs, the company exemplifies our approach to investing in Japan. MonotaRO has built a strong infrastructure in the form of technology (including integration with its customers’ systems) and physical warehouses. The company currently controls about 2% of its industry. And MonotaRO’s market share could go much higher, in our view.

Infomart Corp., another strong Japanese contributor during the quarter, provides an online platform for food-service companies to order from wholesalers. The company is driving digitalization in the food industry, which has traditionally been paper- or fax-based. Shares of the company began climbing at the end of April after release of a favorable earnings report. Gains accelerated in early June when the government made some of Infomart’s products eligible for purchase subsidies, an effort to encourage Japanese businesses to improve efficiency with IT solutions.

Among the Fund’s main detractors in the second quarter were emerging-market names Srisawad Corp. Public Co. Ltd., a finance company in Thailand, and Latin American e-commerce platform MercadoLibre, Inc. (MELI). The declines in these stocks came in the context of a general downturn among emerging markets. Srisawad’s quarterly earnings report included reference to loan-portfolio details that may have given investors pause. We spoke with the management team to gain a better understanding of a surprising nonperforming-loan statistic and, more generally, evidence of margin contraction. We came away satisfied with management’s response, and we maintain our optimism about Srisawad’s growth prospects as the company has been aggressively adding branches. In the case of MercadoLibre, “messy” quarterly figures—due to accounting and data changes—may have contributed to the stock’s decline. Operating revenue has remained strong, as have other metrics we track to gauge the company’s operating performance.

Unifin Financiera S.A.B. de C.V., a Mexican financial-services firm offering leasing, factoring, credit and insurance to individuals and businesses, was also a significant detractor during the quarter. Mexican equities fell as leftist presidential candidate Andrés Manuel López Obrador extended his lead over opponents in a recent poll. Known by his initials (AMLO), Mr. López Obrador is a former mayor of Mexico City and an outspoken critic of U.S. President Donald Trump. Investors feared that a landslide victory by Mr. López Obrador might allow his Morena party to gain a congressional majority. Uncertainty surrounding renegotiation of the North American Free Trade Agreement (NAFTA) between Mexico and the U.S. also appeared to dampen investor enthusiasm for Mexican assets.

LGI Homes, Inc. (LGIH) was another detractor from Fund performance. The company designs and builds entry-level homes in Texas, Arizona, Florida and other U.S. locations. Although earnings per share soared 111% in LGI’s most-recent quarter on 71% revenue growth, exceeding Wall Street expectations, the stock sold off as investors feared rising mortgage interest rates would make homes less affordable for potential buyers. We think these concerns have some validity. However, we believe the company remains a worthwhile holding in the Fund at its current, lower weight. With housing supplies tight and demographics favorable in the markets LGI serves, we think the company still has room to grow. (Current and future holdings are subject to risk.)

Outlook

For several quarters, we made note of the synchronized growth that global economies were experiencing. In the most-recent quarter, however, emerging markets generally broke stride—failing to keep pace with developed countries, the majority of which continued to experience strong growth. As detailed above, several of our emerging-market positions retreated significantly. Nevertheless, we continue to believe that the fundamentals of most emerging markets remain strong even though growth for some has slowed. Last year, we witnessed earning growth of around 30% in emerging markets. More recently, we’ve been seeing growth of about 10%. So while the momentum may have peaked, we think the tide is still positive. We remain especially confident in our investments in India and South Korea, two of our larger allocations to emerging markets.

That said, we also believe there’s significant potential for growth in Europe. To that end, our investment team has two trips planned for later this year, one to Germany and another to Northern Europe. Europe’s economic recovery, though lagging that of the U.S., continues. Stock valuations are less expensive than those in the U.S. and, despite tapering of bond purchases by the European Central Bank, monetary policy in Europe remains accommodative—providing a favorable backdrop for companies to expand their margins. Our initial screens looking for companies to visit have been fruitful. Companies in Germany, France, Switzerland and even Italy—where high-end luxury brands are doing well—appear attractive. As such, we remain confident that we can continue to find reasonably valued companies that offer significant growth potential.

Thank you for the opportunity to manage your assets.

Sincerely,

JB Taylor and Ajay Krishnan

 

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The Wasatch Global Opportunities Fund’s investment objective is long-term growth of capital.

Earnings per share or EPS is the portion of a company’s profit allocated to each outstanding share of common stock. EPS growth rates help investors identify companies that are increasing or decreasing in profitability.

The Federal Open Market Committee (FOMC), a component of the Federal Reserve System, is charged under United States law with overseeing the nation’s open market operations. Open market operations are the means of implementing monetary policy by which a central bank controls the short-term interest rate and the supply of base money in an economy, and thus indirectly the total money supply.

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

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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