Wasatch Emerging India Fund® (WAINX)  Invest in this Fund 

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Q3 2017
Indian Equities Trimmed Gains as International Investors Turned Skittish
by Ajay Krishnan, CFA and Matthew Dreith, CFA

“Stating that there’s ‘no need to panic,’ Finance Minister Arun Jaitley urged Indian companies to step up investments in their businesses rather than defer capital outlays in the face of uncertainty.”

Ajay Krishnan
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Performance for the Institutional Class prior to 2/1/2016 is based on the performance of the Investor Class.  Performance of the Fund's Institutional Class prior to 2/1/2016 uses the actual expenses of the Fund's Investor Class without any adjustments. For any such period of time, the performance of the Fund's Institutional Class would have been substantially similar to, yet higher than, the performance of the Fund's Investor Class, because the shares of both classes are invested in the same portfolio of securities, but the classes bear different expenses.

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.
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For the period ended September 30, 2017, the average annual total return of the Wasatch Emerging India Fund for the 1-year, 5-year and since inception periods were 21.65%, 15.68% and 12.32%. The returns for the MSCI India IMI Index were 16.58%, 7.81% and 2.65% respectively. Expense ratio: Gross 1.87% / Net 1.75%.  

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

A late decline erased some of an earlier advance in Indian stocks, which finished the third quarter with still-reasonable gains. The benchmark MSCI India Investable Market Index (IMI) rose 2.86% for the quarter. Lagging its benchmark somewhat, the Wasatch Emerging India Fund—Investor Class returned 1.49%.

The quarter ushered in the long-awaited replacement of India’s previous complex array of federal, state and interstate taxes with a nationwide goods-and-services tax (GST). The new tax regime is already speeding up the flow of goods throughout India by eliminating time-consuming stops at various checkpoints. However, initial confusion over compliance details has offset some of GST’s benefits in the short term, especially for small businesses.

Severe flooding in parts of India following heavy monsoon rains dealt a more-serious blow to production and transportation activities. A significant drop-off in oil consumption during August reflected the severity of the disruptions, as flooded roads crimped demand for gasoline and diesel fuel. In August, India’s oil consumption declined 6.1% year-over-year, the most since April 2003.

Dislocations caused by the flooding rippled through the country’s economy, impacting supply and triggering an uptick in inflation. Consumer prices rose 3.36% in August, up from 2.36% in July. Investors feared a coming surge in food prices after floods damaged farms in central and eastern India.

Signs emerged that economic headwinds had been brewing even before the third quarter started. An official report released in late August showed India’s gross-domestic-product (GDP) growth slowing to 5.7% during the April-to-June quarter compared to the same period last year. That was down from 6.1% growth during the previous quarter. The weaker-than-expected data fueled speculation of further interest-rate cuts by India’s central bank, which had already lowered its benchmark repurchase rate by 0.25 of a percentage point on August 2nd.

The prospect of lower interest rates weighed on the rupee, which surrendered early-quarter gains against the U.S. dollar. The Indian currency came under additional pressure on fiscal concerns after the government said it was considering measures to stimulate economic growth. A mid-September report showing that India’s current account had deteriorated to its widest deficit in four years further undermined support for the rupee. Stating that there’s “no need to panic,” Finance Minister Arun Jaitley urged Indian companies to step up investments in their businesses rather than defer capital outlays in the face of uncertainty.

Details of the Quarter

The strongest contributor to Fund performance for the quarter was Avenue Supermarts Ltd. The company operates a chain of supermarkets under the D-Mart brand. Avenue’s stores, most of which are company-owned, offer items that range from food to apparel and general merchandise. In the company’s most-recent quarter, net profit rose 47.6% compared to the same quarter last year. With retail distribution in India still largely dominated by small neighborhood stores called kiranas, we think opportunities abound for well-managed operators such as Avenue to formalize their industries and reap significant economies of scale.

Bajaj Finance Ltd. was the Fund’s second-best contributor. An Indian non-bank financial company, Bajaj Finance offers a broad spectrum of lending services that include vehicle loans, mortgage loans, consumer loans and commercial loans. The company’s stock price soared to a 52-week high in September after its qualified institutional placement of equity shares was well-received by investors. Because Bajaj Finance can raise capital at prices well above its book value, its equity offerings generally are accretive to earnings. In the company’s most-recently reported quarter, profit after tax surged 42% compared to the same period a year ago.

Another strong stock in the Fund was AU Small Finance Bank Ltd. A small-finance bank that recently transitioned from a retail-focused non-bank financial company, AU uses its technology-enabled approach to primarily serve low- and middle-income individuals and businesses. The company’s stock rose sharply following its initial public offering in late June. By focusing on customers that traditional banks have difficulty reaching, AU in our view offers a unique business model with substantial headroom for future growth.

The greatest detractor from Fund performance for the quarter was Natco Pharma Ltd. The company markets its branded and generic pharmaceuticals in India, the U.S. and other countries. Profit after tax at Natco jumped 97% in its most-recent quarter on 30% revenue growth compared to the same period a year ago. However, management’s announcement that it plans to focus less on the U.S. and more on India spooked investors, sending the stock lower.

In our view, Natco’s recognition that the U.S. drug market has become less attractive should come as no surprise. Consolidation among the largest U.S. buyers of generic medicines has reduced the pricing power of drug companies. In addition, competition has intensified as manufacturers faced with price erosion in their drug portfolios have sought to replace lost revenue with additional product offerings. We think Natco’s growth prospects in India—together with its remaining niche pipeline in the U.S.—continue to make it a worthwhile holding for the Fund.

Repco Home Finance Ltd. was another significant third-quarter detractor. Headquartered in Chennai, Tamil Nadu, Repco is a regional housing lender focused primarily on southern India. Amid political uncertainty following the death of former chief minister Jayalalithaa Jayaram, land development in Tamil Nadu has slowed considerably, impacting the company’s loan initiations. Although we believe the current setbacks are short-term in nature, Repco is under evaluation by the Wasatch investment team.

Another weak stock in the Fund was Quess Corp. Ltd., an integrated provider of business services. By acquiring smaller companies and integrating their operations, Quess has achieved rapid growth while consolidating the markets it serves. The company’s share price declined in August after its board approved an institutional placement program to raise capital for future acquisitions and other purposes. Given the Quess management team’s track record, however, we believe investor fears of long-term dilution are misplaced. (Current and future holdings are subject to risk.)

Outlook

We don’t believe the recent string of disappointing economic data out of India is anything to be overly concerned about and certainly don’t believe it marks the beginning of a prolonged deceleration of the country’s economy. We had been expecting India’s GDP to slow for a few quarters as companies pared inventories ahead of the July 1st rollout of GST. So, it’s not surprising to see a moderate downtick in growth during the quarter leading up to the GST launch date.

Much has been written about the likely impact on India and other emerging markets as central banks in developed countries prepare to unwind their quantitative-easing programs. Here again, we expect the effects to be limited and short-lived. Current circumstances are very different from 2013, when the prospect of U.S. monetary tightening chased investors out of higher-yielding emerging-market currencies. For most of the third quarter, in fact, India’s central bank faced the difficult task of mopping up enough of the liquidity pouring into the country from overseas to prevent the rupee from appreciating too rapidly.

From a longer-term perspective, we believe India’s vastly improved political climate will continue to underpin investor confidence as recent reforms work their way through the economy.

Thank you for the opportunity to manage your assets.

Sincerely,

Ajay Krishnan and Matthew Dreith

 

The MSCI India Investable Market Index (IMI) covers all investable large, mid and small cap securities across India, targeting approximately 99% of the Indian market’s free-float adjusted market capitalization. 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 Emerging India Fund’s investment objective is long-term appreciation of capital.

Book value is the value of a security or asset as entered in a company’s books.

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.

Quantitative easing is a government monetary policy used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity.

The MSCI India Investable Market Index (IMI) covers all investable large, mid and small cap securities across India, targeting approximately 99% of the Indian market's free-float adjusted market capitalization.

 

You cannot invest directly in indexes.

View the Emerging India 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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