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

Investor Class | Institutional Class
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Q1 2018
Japan Provided a Positive Investment Environment
by Roger Edgley, CFA, Ken Applegate, CFA, CMT and Linda Lasater, CFA

“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 our expertise and on-the-ground research to find companies with outstanding investment potential.”

International Growth
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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 frontier and 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 International Growth Fund for the one-, five- and ten-year periods were 27.11%, 8.92%, and 8.98%, and the returns for the MSCI AC World Ex-U.S.A. Small Cap Index were 20.60%, 8.57%, and 5.51%.  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.


The Wasatch International Growth Fund—Investor Class gained 4.76% in the first quarter of 2018, outperforming the -0.35% loss of the MSCI ACWI (All Country World Index) ex USA Small Cap Index.

Volatility returned following an extremely strong year for global equity markets in 2017. While markets have been choppy and some uncertainty has surfaced, our outlook is still upbeat given the investment opportunities we have been seeing. In Europe, indicators like the Purchasing Managers’ Index (PMI), which gained momentum during 2017, softened during the first quarter. However, Europe remains in expansionary mode. There were also concerns surrounding interest rates along with a handful of other macroeconomic and political concerns. To us, the most important indicator is the perspective we gain from meeting with company management teams from around the world. In 2017, the Wasatch research team had 1,250 face-to-face company meetings and an additional 550 conference calls with company executives. As a result of these meetings, our fundamental outlook for companies generally remains positive.

From an international developed markets perspective we are especially positive on Japan. In continental Europe we are encouraged by the stabilization, and in many cases, expansion in business activity. In the United Kingdom, Brexit negotiations continue to cloud the future and the outlook for the domestic economy remains uncertain.

Details of the Quarter

Japan is the largest country weighting in the Fund at approximately 24.7%, and we are overweight versus the benchmark. The first quarter was very strong for our Japanese holdings as the Fund’s holdings in Japan increased over 16% and significantly outperformed their benchmark counterparts, which returned just 2.1%.

During the first quarter, five members of our investment team spent two weeks visiting more than 80 companies throughout Japan. In addition, we are having dozens more conference calls with company executives that were not available to meet with us while we were in the country.

When preparing for this trip, the pool of potential investments that passed our preliminary hurdle was double the number we have seen in the past. Factors like improved corporate governance and an increase in investing activity has been leading to higher returns on equity for companies and increased earnings growth. Another indicator of a healthy investing environment is initial public offering (IPO) activity. Since the end of 2015, there have been nearly 200 IPOs in Japan. Given that Japan is a global leader when it comes to research and development and innovation, it is no surprise to us that many IPOs came from sectors like information technology (IT). Importantly, we view the quality of these IPO companies as high, with approximately half of them having a return on equity (ROE) of 15% or greater. To put that in perspective, there were more than 300 IPOs in the U.S. during the same time period but just 5% of those had ROEs above 15%. Japan’s small-cap market, one of the most vibrant to be found anywhere in the world, continues to provide a deep pool of interesting small-cap companies that fit our high-quality, long-duration growth profile.

We also have seen a wave of younger and more dynamic CEOs stepping up to lead Japan’s companies of the future. We look for CEOs who understand Japan’s economic landscape but bring a different perspective, perhaps having worked or been educated abroad. These company leaders are challenging the status quo. For example, Infomart Corp. operates an online platform that allows restaurants, food-service companies and wholesalers to order online from Infomart’s wholesalers. Many small Japanese businesses still conduct trade using traditional sales methods, and Japanese companies are known for having multiple layers of distribution. Infomart was an early adopter of online technology and has developed a network that provides an easier, cheaper and quicker solution for its clients to order from wholesale distributors.

Japan faces a number of structural problems such as the demographic headwind of an aging population, and we are investing in a number of companies that benefit from these challenges. The Fund’s top contributor for the first quarter was Nihon M&A Center, Inc. The company connects sellers and buyers of small businesses and has been benefiting from the demographic trends of baby boomers retiring and looking to sell their businesses. It is the leading firm in Japan servicing such small businesses. In addition, Nihon’s 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.

The labor shortage in Japan remains acute. This conversation came up at nearly every meeting we had while we were there. The most recent jobs-to-applicant ratio rose to 1.59, and unemployment is at a 25-year low. The Fund is invested in a number of companies with the potential to benefit including en-Japan, Inc., operator of an online job site that also provides recruitment agency services, and SMS Co. Ltd., a provider of recruitment services and software for the health-care market.

Japanese companies also need to invest in technology, particularly small and medium-size enterprises (SMEs) that need to improve efficiency and productivity given competitive factors, changes in customer behavior, and the need to do more with fewer people. GMO Payment Gateway, Inc. offers regional banks a mobile platform to help them better compete with the offerings of bigger banks. MonotaRO Co. Ltd. is cutting out the middleman in the traditional method of distributing maintenance, repair and operations supplies to SMEs by providing a one-stop shop, which saves its customers time and money.

Seria Co. Ltd., which operates a chain of 100-yen stores (essentially dollar stores) in Japan, was one of the Fund’s detractors during the quarter. The company had some issues with its IT inventory system, which partially contributed to a decrease in sales and an increase in costs in order to remedy the situation. We spent time with Seria’s president who was disappointed and even embarrassed that this issue had occurred. The company has an industry-leading IT system, and while this was just a short term and relatively minor glitch, it did impact earnings and led to a selloff of Seria’s shares. We believe the quality of this company is high and the long-term fundamentals are strong, and we continue to hold the stock.

Our investment team also traveled to France during the quarter. While we didn’t find any new actionable ideas, our visit reinforced our view that the investing environment is improving in France. Labor and tax reform in France have the potential for a positive medium- to long-term impact on the French economy and market. To the extent this occurs, we expect it would have a flow-on effect to other countries in Europe.

Maisons du Monde S.A., an omnichannel furniture retailer based in France, is expanding its concept throughout Europe. While the company’s earnings were strong, the shares sold off in the first quarter after management issued conservative guidance for 2018. The stock of Ipsen S.A., a French pharmaceutical company that has transitioned into a global producer of specialty pharmaceuticals, rallied during the quarter on the back of stronger-than-expected earnings and an exciting new pipeline of products. Most importantly, the long-term investment thesis we hold for both companies appears to be intact, and we have maintained our positioning in them.

We also continue to be 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. India was an underperforming market during the quarter, but the fundamentals of the companies we own remain positive and we used this as an opportunity to increase positions in select holdings. (Current and future holdings are subject to risk.)


The backdrop for international small-cap equities remains constructive. We have seen an increase in valuations but also a recovery in European corporate earnings. Europe is in the early stages of an economic expansion with companies beginning to invest in their businesses again following a long period of underinvestment. While there are factors that could derail this expansion, we currently see strong corporate activity and expect earnings growth to drive stock prices going forward.

It is surprising to many that Japan’s small-company stocks have been outperforming the global small-cap universe. The MSCI Japan Small Cap Index has increased 25.5% over the past year. This compares to the MSCI World Small Cap Index return of 15.9% and the MSCI USA Small Cap Index return of 12%. Looking back at the last five years, the MSCI Japan Small Cap Index has increased at an average annual rate of 12.5%, which compares favorably to the MSCI World Small Cap Index return of 10.9% and the MSCI USA Small Cap Index return of 11.6%.

Within Japan, small-cap stocks have been outperforming large-cap stocks and quality stocks also have been outperforming. These factors create a positive investing environment for us. 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 our expertise and on-the-ground research to find companies with outstanding investment potential.

Thank you for the opportunity to manage your assets.


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.

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.

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

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

The MSCI Japan Small Cap Index is designed to measure the performance of the small cap segment of the Japanese market. With 877 constituents, the index represents approximately 14% of the free float-adjusted market capitalization of the Japan equity universe.

The MSCI USA Small Cap Index is designed to measure the performance of the small cap segments of the U.S. market. With 1,769 constituents, the index covers approximately 14% of the free float-adjusted market capitalization in the United States.

The MSCI World Small Cap Index captures small cap representation across 23 developed market countries. With 4,283 constituents, the index covers approximately 14% of the free float-adjusted market capitalization in each country.

The Purchasing Managers Index (PMI) is an indicator of the economic health of the manufacturing sector. The PMI is based on five major indicators—new orders, inventory levels, production, supplier deliveries, and the employment environment.

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

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.

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