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

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Q4 2017
Beyond the U.S., the Fund Saw Good Results in Japan
by Josh Stewart and Sam Stewart, CFA

“While we had been anticipating a wealth of new investment opportunities in Japan, many of those opportunities have gotten away from us due to rapid stock-price increases.”

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For the period ended December 31, 2017, the average annual total returns of the Wasatch World Innovators Fund for the one-, five- and ten-year periods were 32.96%, 13.22%, and 8.50%, the returns for the MSCI AC World IMI Index were 23.95%, 11.00%, and 4.97%. 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.


During the final quarter of 2017, the Wasatch World Innovators Fund—Investor Class benefited from strong gains across both developed and emerging markets. Most notable was the contribution from newly public Roku, Inc. (ROKU)—the leading platform for streaming video content to U.S. televisions (ahead of Apple TV and Google Chromecast)—that accounted for the bulk of the Fund’s outperformance relative to the Index.

Capping a strong year overall, the Fund gained 8.47% during the quarter ended December 31, 2017, outperforming the 5.72% return of the benchmark MSCI ACWI (All Country World Index) IMI (Investable Market Index).

Details of the Quarter

Roku, mentioned above, contributed 2.29 percentage points to Fund performance during the fourth quarter. Best known for its digital-media devices that enable the streaming of paid-subscription content—like Netflix, Amazon Video and HBO NOW—Roku has been busy building a software interface and a sales force to bring on advertising revenue that will enable ad-supported “apps” to use the Roku platform to stream TV series and movies at no additional cost to viewers.

Additionally, Roku has begun selling its operating system to low-cost television manufacturers, a bit like Google did for smartphones with its Android operating system. The high-margin platform segment, which includes revenue from advertising and software licensing, grew well over 100% during the September quarter, handily beating analysts’ estimates and leading to a sharp increase in the stock price after results were announced. Going forward, we expect more of the same from the platform segment. And we expect the low-margin devices—which act as teasers to get the Roku platform into households—to fall from relevance.

In short, we think Roku remains a good fit for the Wasatch World Innovators Fund—with the potential for significant upside from here. The company is currently on a path to become the leading platform for “cord-cutters.” And ad dollars are migrating away from satellite, cable and free over-the-air TV in order to target these attractive customers.

Sony Corp., based in Japan, was our second-largest contributor during the fourth quarter. The company has been divesting business lines where products are being commoditized and not contributing to profitable growth. Meanwhile, Sony has been adding resources to successful business lines like the PlayStation® franchise, which remains the corporate crown jewel and once again experienced strong holiday sales. Overall, we think Sony continues to have a reasonable valuation and a considerable amount of cash on hand, which current management has proven adept at investing in good, profitable and growing business lines.

Japanese contact-lens manufacturer Menicon Co. Ltd. was another strong contributor to Fund performance during the quarter. For years, the company had fallen behind its competitors, failing to keep pace with disposable-lens technology. But the addition of new products and the introduction of a monthly subscription model in Japan have led to a rejuvenation of Menicon’s business. The company went public not long ago, but the stock was still relatively undiscovered and undervalued when we found it. More recently, however, we trimmed our position after several strong quarterly earnings reports drove the stock price and the valuation multiple much higher.

German company Borussia Dortmund GmbH & Co. KGaA (a.k.a., Dortmund) was the largest detractor from performance during the fourth quarter, subtracting 0.21 of a percentage point from the Fund’s return. Dortmund is a European football club in the Bundesliga, which is Germany’s top league. Based on the club’s initial success in league play, the stock price had done well during the prior quarter. That proved short-lived, however, as the club’s performance fell off in the domestic league and the team failed to advance in the Champions League tournament. Nevertheless, we still believe there’s considerable upside because European football clubs trade at very low multiples, especially compared to their American professional-sports counterparts. (Current and future holdings are subject to risk.)


In our last commentary, we remarked that we believed Japan offered significant opportunities for investors seeking attractively valued equities. Japan had recently emerged from a decades-long deflationary environment. The country’s gross domestic product had marked six straight quarters of expansion. And we were increasing our portfolio weighting.

Having said that, we traveled to Japan during the December quarter to visit companies we uncovered using quantitative screens. We believed the list was comprised of quality companies that looked relatively inexpensive compared to global peers. Only weeks later, as we worked our way through company visit after company visit, we couldn’t help but feel disappointed as so many of our prospects had already experienced significant stock-price gains—some in excess of 30%.

Of course, we had also benefited from our existing Japanese investments, two of which are noted above. And we did find a few companies we liked, which is par for most research trips. But we had been anticipating a wealth of new opportunities. Unfortunately, for now, those opportunities have gotten away from us.

As we begin 2018 in the midst of a full-throttle bull market and historically high stock valuations, we’ll rely on our flexibility to go anywhere in the world to find great innovative companies to invest in at reasonable prices.

Thank you for the opportunity to manage your assets.


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.

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

As of December 31, 2017, the Wasatch World Innovators Fund held 0.94% of its net assets in Amazon.com, Inc. Positions in Alphabet, Inc. and Netflix, Inc. were sold during the quarter. Neither Alphabet nor Netflix were held by the Fund as of December 31, 2017.

A bull market is defined as a prolonged period in which investment prices rise faster than their historical average. Bull markets can happen as the result of an economic recovery, an economic boom, or investor psychology.

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.

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

The price-to-earnings (P/E) multiple, also known as the P/E ratio, is the price of a stock divided by its earnings per share.

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.

View the World Innovators Fund’s most current Top 10 Holdings

Portfolio holdings are subject to change at any time. References to specific securities should not be construed as recommendations by the Funds or their Advisor.

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CFA® is a trademark owned by CFA Institute.