Wasatch World Innovators Fund® (WAGTX)  Invest in this Fund 

Investor Class | Institutional Class
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Q1 2018
Fund Outperformed in a Volatile Quarter
by Josh Stewart and Sam Stewart, CFA

“Japan and the United States were the largest contributors to the Fund’s absolute and relative performance.”

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Investing in small or micro cap funds will be more volatile and loss of principal could be greater than investing in large cap or more diversified funds.
Investing in foreign securities, especially in emerging markets, entails special risks, such as currency fluctuations and political uncertainties, which are described in more detail in the prospectus.

For the period ended March 31, 2018, the average annual total returns of the Wasatch World Innovators Fund for the one-, five- and ten-year periods were 27.35%, 11.82%, and 11.54%, the returns for the MSCI AC World IMI Index were 15.03%, 9.34%, and 5.90%. Total Expense Ratio: 1.83%.

 

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.

A NOTE REGARDING PROPOSED CHANGES TO THE WASATCH WORLD INNOVATORS FUND

According to an announcement made subsequent to the end of the quarter, it is planned that portfolio managers Josh Stewart and Sam Stewart will leave Wasatch Advisors to join Seven Canyons Advisors, LLC, an SEC-registered investment advisor recently established by members of the Stewart family. In addition to their departures, the Wasatch Funds Board of Trustees approved a plan to merge the Wasatch World Innovators Fund into a new fund with similar objectives and strategies to be managed by Josh and Sam at their new family-owned firm. The Wasatch Funds Board of Trustees approved the merger plan, concluding it’s in the best interest of the Fund’s shareholders. For more information regarding these proposed changes, please visit the website at www.WasatchFunds.com.

Overview

Benefiting from strong performance in the industrials, information-technology and consumer-discretionary sectors, the Wasatch World Innovators Fund—Investor Class gained 1.87% in the first quarter of 2018, while its benchmark, the MSCI ACWI (All Country World Index) IMI (Investable Markets Index), lost -0.89%.

All three of the aforementioned sectors outperformed their benchmark counterparts, aided by advantageous stock selection. The consumer-staples and health-care sectors were the most significant detractors from performance relative to the benchmark, also due largely to stock selection.

On a country basis, Japan and the United States were the largest contributors to the Fund’s absolute and relative performance. The Fund has a substantial overweight relative to the benchmark in Japan. That, combined with the strong return of the Fund’s Japanese holdings, generated over two-thirds of the Fund’s overall outperformance of the benchmark for the quarter. Although the Fund has benefited from its positions in Japanese information-technology companies, we have been realizing profits and reducing our exposure to that sector in favor of consumer sectors that we think will provide steadier returns going forward. Among the holdings we recently trimmed were Nintendo Co. Ltd., the Fund’s third-best contributor, and Sony Corp., also a strong contributor.

Conversely, the Fund is significantly underweight compared to the benchmark in the U.S. Nonetheless, our position in the U.S. added significantly to the Fund’s overall outperformance of the Index. Our U.S. holdings produced a gain while those in the Index were down for the quarter.

The Fund’s small U.S. allocation (12.5% average weight versus the benchmark at 51.8%) reflects our view that many stocks are overvalued and our decision to put assets to work in overseas markets that we see as having better upside. Although this may have limited the Fund’s exposure to the benefits of the corporate tax rate reduction enacted at the end of last year, it undoubtedly reduced the impact of the volatility that afflicted domestic markets in March, as investors reacted to the implementation of tariffs on steel and aluminum. Given the strong gains the Fund achieved in tech stocks in 2017, we have been trimming our exposure to high-priced U.S.-based tech companies. Notably, we exited Amazon.com, Inc. and PayPal Holdings, Inc. during the quarter. As it turned out, both of these stocks, and Amazon in particular, suffered severe declines at the end of the quarter.

Details of the Quarter

The New York Times Co. (NYT) was the top contributor during the quarter. The company has been doing well overall, given its high-quality content with demonstrated value. While the print business is declining, both in terms of subscriptions and advertising, the company is making good progress in transitioning to a digital business. Little more than a year ago, the company’s digital subscriber base had been growing at an annual rate in the mid-teens; since the Trump administration took office that has climbed to more than 40%.

V-Technology Co. Ltd., based in Japan, manufactures equipment used in the production of flat-panel displays for televisions, computer monitors and other applications. The second-best contributor during the quarter, V-Technology has established a joint venture in China, which is eager to take market share from Samsung-dominated Korea. V-Technology, which also manufactures LCD screens for the Japanese market, is one of the few companies that sells the equipment necessary to manufacture the displays and has been reporting strong results.

SodaStream International Ltd. (SODA) was another leading contributor. Based in Israel, the company sells home beverage-carbonation systems and related consumables. Reflecting shifting trends in soft-drink consumption, the company has repositioned itself from a purveyor of sugary sodas to a maker of flavored sparkling water. SodaStream’s shares gained sharply in February after the company’s most-recent earnings results beat consensus estimates.

Roku, Inc. (ROKU) was the leading detractor from Fund performance in the first quarter. The Fund’s top contributor for the fourth quarter, Roku has continued to report good results. But, like other investors, we had been expecting even better results and so were disappointed. Nevertheless, we retain our positive view of the company’s growth potential based on its development of a solid platform for digital streaming. It seems like the stock had just gotten ahead of itself.

Vilmorin & Cie S.A. was the second-largest detractor from Fund performance. This French company produces and markets vegetable and crop seeds for professional markets including agriculture, canning, processors and specialists in freezing. We invested in the company on the belief that the seed business is steady with mid-single-digit growth. That said, the vegetable business slowed down during the quarter, adversely affecting the share price. We trimmed our position somewhat, but still have a meaningful weight. We continue to believe in the company’s potential to do well over the long run.

Guerbet S.A. is a French producer of contrast agents used to enhance X-ray and MRI images. The company was a notable detractor from Fund performance during the quarter, despite reporting a good year for 2017. Guerbet has been experiencing more competition from generic producers, but we think the company has outstanding long-term growth prospects. Guerbet’s new contrast agents are said to be safer than those used previously and appear to be priced reasonably. We expect volumes and profits to rise, even as prices come down. (Current and future holdings are subject to risk.)

Outlook

We just returned from a trip to Indonesia and Malaysia. With stock valuations high throughout developed countries and many emerging-market countries as well, we were hoping to find some attractive opportunities in a part of the world where, so far, valuations remain reasonable. While both countries have experienced good gross domestic product (GDP) growth, their equity markets have lagged. For us, at least, the similarities end there.

Our sense of the mood in Malaysia is that its population is depressed. The country is in the throes of a political scandal concerning Prime Minister Najib Razak. Under investigation by the U.S. Justice Department in a money-laundering case, Razak has been accused of skimming nearly a billion dollars from a government fund he oversaw. Combined with the likelihood that Razak will win reelection next year, the beneficiary of an electorate segmented along religious and ethnic lines, the country is stagnating.

Indonesia, however, seems to be vibrant and thriving. With about 260 million people and a rising middle class, we sense solid long-term growth opportunities for the country as a whole. Jakarta, the capital and largest city, is thronged with people, scooters and cars. No one walks. The traffic is insane. Unlike Malaysia, the president of Indonesia, Joko Widodo, who is up for reelection in 2019, is committed to transportation and other infrastructure projects that should provide economic boosts.

Based on our visit, we added several companies in Indonesia that we feel are well-positioned. PT Media Nusantara Citra Tbk is the largest television-content producer in the country and also operates television stations. We believe the company is likely to benefit from campaign advertising during the upcoming national election cycle as demand for spots and viewership increases and supports higher rates. PT Sarana Menara Nusantara Tbk owns, operates and leases telecommunication towers for wireless operators in Indonesia. The company is expected to benefit from increasing penetration of mobile phones.

We’ve maintained our position in the United Kingdom, largely on the belief that Brexit is not as big a story as many people believe. In the end, we think negotiators for the U.K. and the European Union will come up with a deal that’s fair for both sides. We believe the companies we own in the U.K. are good businesses that are priced fairly. Although our U.K. stocks have yet to go up appreciably, on the other hand, they haven’t done badly. As a result, we haven’t seen fit to adjust our overweight relative to the benchmark.

Thank you for the opportunity to manage your assets.

Sincerely,

Josh Stewart and Sam Stewart

 

 

**The MSCI AC World IMI (All Country World Investable Market Index) is a free float-adjusted market capitalization weighted index designed to measure the equity market performance of large, mid, and small cap companies across developed and emerging markets throughout the world. You cannot invest directly in this or any index.

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CFA® is a trademark owned by CFA Institute.

The Wasatch World Innovators Fund’s investment objective is long-term growth of capital.

Brexit is an abbreviation for “British exit,” which refers to the June 23, 2016 referendum whereby British citizens voted to exit the European Union. The referendum roiled global markets, including currencies, causing the British pound to fall to its lowest level in decades.

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.

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

The MSCI AC World IMI Index (All Country World Investable Markets Index) is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of large, mid, and small cap companies across developed and emerging markets throughout the world.

 

You cannot invest directly in indexes.

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