Wasatch International Growth Fund® (WAIGX)  Invest in this Fund 

Investor Class | Institutional Class
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Q4 2017
Fund Outperformed the Benchmark in 2017 led by Investments in Japan
by Roger Edgley, CFA, Ken Applegate, CFA, CMT and Linda Lasater, CFA

“Japan’s small-cap market, one of the most vibrant to be found anywhere in the world, provides a deep pool of interesting small-cap companies that fit our high-quality, long duration growth profile.”

International Growth
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For the period ended December 31, 2017, the average annual total returns of the Wasatch International Growth Fund for the one-, five- and ten-year periods were 33.01%, 10.03%, and 6.73%, and the returns for the MSCI AC World Ex-U.S.A. Small Cap Index were 31.65%, 10.03%, and 4.69%.  Expense ratio: Gross 1.46% / Net 1.46%.

 

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 Wasatch International Growth Fund—Investor Class returned 4.48% for the fourth quarter and 33.01% for the year ended December 31, 2017, while the benchmark MSCI ACWI ex USA Small Cap Index returned 6.56% and 31.65% for the quarter and year, respectively.

The year 2017 was marked by broad based strength across both sectors and countries, driven by synchronized strengthening of global economies and low levels of inflation. Equity markets across the globe saw multi-year, if not all-time, highs as measured by indexes including the TOPIX and Nikkei 225 in Japan, the FTSE 100 in the United Kingdom, the DAX in Germany, and the Nasdaq Composite, S&P 500® and small-cap Russell 2000® in the United States.

In the fourth quarter, the stocks of higher quality, faster growing companies continued to outperform those of lower quality, slower growing companies. Sectors including information technology, consumer staples, health care and consumer discretionary saw strong performance, while more cyclical sectors including energy, financials, utilities and industrials lagged within the benchmark.

Details of the Quarter and Year

Japan, the largest country weighting in the portfolio at approximately 24.6%, was one of the largest contributors to the Fund’s return for the fourth quarter and the 2017 calendar year. In the fourth quarter, Japan returned about 7% for the Fund and slightly underperformed its benchmark peer, which returned nearly 9%. For 2017, the Fund’s holdings in Japan returned over 45% and outperformed their benchmark counterparts by a wide margin.  

We continue to have a positive view on Japan. With Prime Minister Shinzo Abe’s reelection and his Liberal Democratic Party retaining its two-thirds “super-majority” in the lower house of parliament, his consolidated position and influence will pave the way to further adoption of his “three arrows” (monetary easing, fiscal stimulus and structural reforms) economic framework aimed at reform and growth.

Japan’s small-cap market, one of the most vibrant to be found anywhere in the world, provides a deep pool of interesting small-cap companies that fit our high-quality, long duration growth profile. Many 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 in Japan, we believe we can continue to generate strong performance in the region.

Seria Co. Ltd., the Fund’s top contributor for the year with a gain of over 75%, also contributed to its fourth quarter return. Seria operates a chain of 100-yen stores (equivalent to dollar stores in North America) in Japan. The company is the second largest player in the industry and has embraced technology to drive strong merchandising and efficiencies. Seria has continued to produce strong results and gain market share.

MISUMI Group, Inc. is the world’s largest manufacturer of dies, and also manufactures other items for factory floors such as bolts, nuts, etc. MISUMI manufactures nearly all parts in-house, and scale gives it a cost advantage versus competitors. With a heavy investment in rapid logistics between Japan, China and Vietnam, MISUMI has also entered the maintenance, repair and operations (MRO) business. Nihon M&A Center, Inc. connects sellers and buyers of small businesses. Nihon M&A has been benefiting from the demographic trends of baby boomers retiring and looking to sell their businesses. It is one of the few firms servicing such small businesses. In addition, management has enhanced the company’s market position by hosting informational seminars for sellers, and by building relationships with banks, accounting firms and other lead-generating sources. Nihon M&A also has a robust information-technology backbone, which allows multiple parties to submit information and leads, further enhancing its platform. Both companies were among the Fund’s top 10 contributors to performance for the year.

Interestingly, the U.K. was the Fund’s second-largest country contributor for the year, despite ambiguity surrounding ongoing Brexit negotiations. The Fund’s holdings returned 38% against the benchmark’s 32.5%. In the second half of the year, the U.K. market began to weaken as consumer sentiment was poor and pressures from cost inflation began to affect companies’ earnings. At the beginning the year, we deemphasized more domestically oriented companies that we felt would be disproportionately impacted by uncertainty around Brexit and emphasized companies that derived a majority of revenues internationally.

Abcam plc was one of the Fund’s largest contributors for in the year returning over 50%. Abcam is the global leader in the sales of antibodies for life-science research. International markets provide over 90% of Abcam’s revenues. The company has invested extensively in its online platform. Management is currently strengthening and the company’s delivery capabilities and handling of large orders. We believe Abcam will eventually sell the majority of antibodies used in research around the world through its online platform. Given its scale, dominant position and abundant growth opportunities, we are optimistic about the company’s prospects.

Clinigen Group plc, another top contributor for the year, returned over 58%. The company is a global distributor of pharmaceuticals in specialized areas. With scale, a strong distribution network and close relationships with drug companies, the company has been able to consolidate and solidify leading positions in each of its niche segments.

Continental Europe is firmly in a cyclical recovery and equity market performance across the region was strong. European corporate earnings have been recovering as capital investments have increased after years of underinvestment. Economic indicators have continued to improve. Major elections in the Netherlands, France and Germany supported markets with no major unexpected shifts in policy. Companies like XING SE (Germany), an online career networking site, and Chr. Hansen Holding A/S (Denmark), a provider of natural ingredients to food makers, both contributed strongly to the Fund’s 12-month return.

XXL ASA (Norway) sells sporting goods across Scandinavia. Consumer sentiment and weather affected the company’s performance and caused it to detract from the Fund’s performance. We continue to like XXL as it has a disruptive big box, low cost model that continues to take market share. In second half of the year, the company had a hugely successful store opening in Austria, which we believe can pave the way for broader European expansion.

Other holdings that were major detractors for the year included Gurunavi, Inc. and Domino’s Pizza Enterprises Ltd. Gurunavi has a strong position as the leading restaurant portal within Japan. Challenging trends within the restaurant industry and major investments to drive growth, which management did not clearly outline or disclose resulted in unexpected earnings misses and caused us to lose confidence in this holding. We have since exited our position.

Despite being a detractor for the year, Domino’s Pizza has been a long-term contributor to the Fund’s performance. During the year, the company faced challenges in labor relations and driving same-store-sales after a multi-year period of double-digit comparable growth. We believe the company has a solid position in Australia. Domino’s has generated strong cash flows and we think the Australian market is an ideal testing ground for new technologies and ideas that the company can redeploy across its developing international operations.

Emerging markets were also challenging for the Fund in 2017. The Fund was underweight in emerging markets compared to the benchmark and the performance of our holdings lagged. With stronger fundamentals of companies buoyed by economic growth across the globe, we found new opportunities outside of emerging markets, which led us to reduce the Fund’s emerging market holdings to those we believe are higher quality and typically lower beta. Of the names we continued to hold, many of them did not keep pace with the strong recovery underway in emerging markets. Nevertheless, we remain optimistic regarding their positioning and potential to produce the long-term performance we expect. Vitasoy International Holdings Ltd., a producer of beverages in Hong Kong and China, is a great example of the power of patience and the compounding potential of a high-quality stock. Vitasoy’s stock has outperformed the Index by over 300% over a five-year period. (Current and future holdings are subject to risk.)

Outlook

We continue to be positive on the investment outlook for a majority of the markets in our universe and are confident in the current positioning of the Fund. We remain especially positive on Japan. The macro environment has continued to improve with unemployment at near 20-year lows, wage inflation beginning to materialize, and a greater focus by corporations on shareholder-friendly practices and improving returns on equity. Business confidence has been strong, particularly among the management teams Wasatch has spoken with. Despite being one of the largest developed economies in the world, Japan’s market is still inefficient and misunderstood by many investors, which provides opportunities for us to use on-the-ground research to find companies with outstanding investment potential.

In the U.K., Brexit negotiations cloud the future, though we remain optimistic regarding the prospects of our holdings in the country. European corporate earnings have been recovering after years of underinvestment and economic indicators have continued to improve. Although stock valuations have risen, we believe the economic expansion now underway could last longer than expected and drive strong earnings growth for companies over a multi-year period.

We are upbeat about the investment opportunities in emerging markets. Emerging markets have continued to produce strong results based on optimism over growth and returning investment. We like the strength we have been seeing as companies have been producing the earnings growth we expect. Currencies of developing countries appear to have stabilized and are more competitive. Current account balances have improved for the majority of emerging markets and stock valuations are still below long-term averages.

Tighter global monetary policy could increase volatility, but overall, we’re excited about the future of international stocks and have a positive view of their expanding role in the global economy.

Thank you for the opportunity to manage your assets.

Sincerely,

Roger Edgley, Ken Applegate and Linda Lasater

 

 

**The MSCI ACWI ex USA 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, excluding securities of U.S. issuers. This index is a free float-adjusted market capitalization index designed to measure the performance of small capitalization securities.

The MSCI World ex USA Small Cap Index is a free float-adjusted market capitalization weighted index designed to measure the equity market performance of developed markets, excluding the United States.

You cannot invest in these or any indexes.

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 International Growth Fund’s investment objective is long-term growth of capital.

Beta is a quantitative measure of the volatility of a given stock relative to the overall market. A beta above one is more volatile than the overall market, while a beta below one is less volatile.

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.

The DAX (Deutscher Aktienindex) is a blue chip stock market index comprised of 30 major German companies whose stocks are traded on the Frankfurt Stock Exchange. The prices used to calculate the DAX Index come through Xetra, an electronic trading system. You cannot invest directly in this or any index.

Earnings growth is a measure of growth in a company’s net income over a specific period, often one year.

The FTSE 100 Index (The Financial Times Stock Exchange 100 Share Index) is an average of the share prices of the 100 largest, most actively traded companies on the London Stock Exchange. The Index is co-owned by the London Stock Exchange and The Financial Times. You cannot invest directly in this or any index.

The Nasdaq Composite Index is a market-capitalization weighted index of the more than 3,000 common equities listed on the Nasdaq stock exchange. The types of securities in the index include American depositary receipts, common stocks, real estate investment trusts (REITs) and tracking stocks. The NASDAQ was created by the National Association of Securities Dealers (NASD) to enable investors to trade securities on a computerized, speedy and transparent system, and commenced operations on February 8, 1971. You cannot invest directly in this or any index.

The Nikkei 225 Stock Index is a price-weighted index of the 225 top Japanese companies (called the First Section) that are listed on the Tokyo Stock Exchange (TSE). You cannot invest directly in this or any index.

Return on equity (ROE) measures a company’s efficiency at generating profits from shareholders’ equity.

The Russell 2000 Index is an unmanaged total return index of the smallest 2,000 companies in the Russell 3000 Index. The Russell 2000 is widely used in the industry to measure the performance of small company stocks. You cannot invest directly in this or any index.

The S&P 500 Index includes 500 of the United States’ largest stocks from a broad variety of industries. The Index is unmanaged and is a commonly used measure of common stock total return performance. You cannot invest directly in this or any index.

The Tokyo Stock Price Index, commonly known as TOPIX, is a free-float adjusted market capitalization-weighted index that is calculated based on all the domestic common stocks listed on the Tokyo Stock Exchange (TSE) First Section. It is calculated and published by the TSE. You cannot invest directly in this or any index.

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

The MSCI World Ex U.S.A. Small Cap Index is an unmanaged index that measures the performance of stocks with market capitalizations between U.S. $200 million and $1.5 billion across 22 developed markets, excluding the United States.   The MSCI AC World Ex U.S.A. 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, excluding securities of U.S. issuers. This index is a free float-adjusted market capitalization index designed to measure the performance of small capitalization securities.  

You cannot invest directly in indexes.

View the International Growth Fund’s most current Top 10 Holdings

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