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

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4Q18
Falling Oil Prices Were a Windfall for India’s Economy
by Ajay Krishnan, CFA and Matthew Dreith, CFA

“Because India imports about 80% of the oil it uses, Brent crude’s steep decline quelled inflation, improved the outlook for the current-account deficit and burnished India’s currency, the rupee.”

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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.

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For the period ended December 31, 2018, the average annual total return of the Wasatch Emerging India Fund for the 1-year, 5-year and since inception periods were -5.50%, 17.05% and 11.13%. The returns for the MSCI India IMI Index were -11.19%, 8.96% and 2.31% respectively. Expense ratio: Gross 1.70%.  

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

Tight funding conditions in India eased during the fourth quarter of the year, with lending and business activity picking up. The Wasatch Emerging India Fund—Investor Class returned 6.94% for the quarter. The Fund outperformed its benchmark, the MSCI India Investable Market Index (IMI), which rose 3.20%.

New data showed that India’s economic growth moderated during the third quarter of 2018 as currency weakness, rising oil prices and a liquidity squeeze crimped sentiment. According to a report released by the Statistics Ministry in November, gross domestic product expanded at a 7.1% pace during the September quarter, down from 8.2% in the April-June period. In December, the government slashed goods-and-services tax rates on 23 items in a move designed to encourage consumption and boost the economy ahead of national elections in 2019.

Corporate and government borrowing costs fell during the fourth quarter. A steep slide in the price of crude oil quelled inflation and sparked a rally in India’s bond market, pushing yields lower. Consumer prices rose 2.3% in November from a year ago—down from a 3.4% gain in October and the smallest increase in 17 months. Because India imports about 80% of the oil it uses, Brent crude’s decline of nearly -38% from its high in early October through December 31st improved the outlook for the current-account deficit and burnished India’s currency, the rupee. The rupee appreciated 4.2% against the U.S. dollar during the quarter.

Optimism about the future course of monetary policy helped support stock and bond prices following the appointment of Shaktikanta Das as the new governor of the Reserve Bank of India (RBI). Investors hoped receding inflation would give the central bank scope to cut its policy interest rate in 2019. Policy rates in India are determined by a panel that includes the governor. The rally in bonds gained steam after the RBI extended its purchases of debt in the open market.

Information technology (IT) was the weakest sector of the Index, followed by energy. The Fund’s significantly below-benchmark weight in IT and lack of investments in energy were tailwinds to performance relative to the benchmark.

Other sources of outperformance in the Fund included materials and health care. Our stocks in these sectors posted healthy gains, outpacing the materials and health-care components of the Index. The consumer-discretionary sector was the greatest source of weakness against the benchmark, as declines in a few individual holdings hurt the Fund’s performance.

Details of the Quarter

Improving liquidity benefited Indian financials, which comprised many of the Fund’s best performers. Among these were the two top contributors to performance for the quarter, Bajaj Finance Ltd. and Housing Development Finance Corp. Ltd. (HDFC), respectively. Bajaj Finance is a non-bank financial company offering a broad spectrum of lending services. Having declined during the third quarter, shares of Bajaj Finance rebounded on an easing of the interest-rate pressures that had threatened to increase its funding costs. Looking forward, we think the backing of Bajaj Group, the parent company, will provide Bajaj Finance with a key advantage over weaker competitors.

HDFC, the parent company of HDFC Bank, provides housing loans to low- and middle-income individuals, as well as to corporate borrowers. HDFC’s stock price began rising in November after the company reported a 25% increase in after-tax profit in its most-recent quarter compared to the same quarter last year. The loan book grew 17% on an assets-under-management basis over the same period. Management cited Prime Minister Narendra Modi’s “Housing for All by 2020” initiative, which offers subsidies to homebuyers.

Divi’s Laboratories Ltd. was the third-largest contributor. The company manufactures active pharmaceutical ingredients (APIs) and intermediates. Because Divi’s derives most of its revenues from exports, the company benefits from weakness in the rupee against other currencies. Enhanced by foreign-exchange gains, net profit at Divi’s jumped 92% year-over-year in the September quarter on revenue growth of approximately 45%. Citing opportunities in the generic and big-pharma segments of its business, the company announced plans to increase capacity at its Visakhapatnam and Bhuvangiri-Yadadri facilities.

Consumer-discretionary stocks accounted for three of the largest detractors from Fund performance—including the quarter’s greatest detractor, Page Industries Ltd. The company manufactures and sells undergarments branded with the Jockey name in India, Sri Lanka, Bangladesh, Nepal and the United Arab Emirates. Page is also the exclusive licensee for the manufacture, marketing and distribution of the Speedo brand in India. Although Page posted double-digit percentage increases versus the year-ago quarter in total revenue and profit after tax, the results fell short of expectations. We believe the company’s long-term growth prospects remain intact, however, and we continue to own the stock in the Fund.

The other two consumer-discretionary holdings detracting significantly from performance were MakeMyTrip Ltd. (MMYT) and Endurance Technologies Ltd. Endurance makes automotive components for vehicle manufacturers in India and Europe. The company’s European operations, which account for around 28% of consolidated revenues, primarily supply aluminum-casting products for four-wheeled vehicles. The stock price of Endurance declined approximately -4% in local-currency terms during the fourth quarter amid concerns that slowing global growth may impact sales of automobiles. We see a clear path for Endurance to increase its content per vehicle, which we expect will lead to improved growth rates for the company.

MakeMyTrip operates the leading online travel agency in India. The stock has underperformed due to deceleration in the company’s growth as management is in the process of recalibrating the business to focus on more profitable customers. We believe this will make the business more stable over the long term. On another front, the competitive pressures MakeMyTrip had been facing seem to have eased since the company’s merger with Goibibo. During the fourth quarter, MakeMyTrip’s stock appears to have declined somewhat in sympathy with other equities traded in the U.S. on the Nasdaq Stock Market. (Current and future holdings are subject to risk.)

Outlook

Urjit Patel’s abrupt resignation in December as governor of the RBI rattled investors. The apparent culmination of months of rising tensions between the government and the central bank, the announcement raised questions about the RBI’s future autonomy. The Modi government has been pressuring the RBI to transfer control of surplus funds and loosen restrictions on weak state-run banks to ensure continued lending prior to the 2019 elections. While the biggest fear following Mr. Patel’s exit is a potential reversion to a higher-inflation regime in support of the government’s agenda, one could also argue that the RBI’s recent policy and regulatory stances have been unduly punitive.

In November, three Wasatch team members spent two weeks in India visiting companies and conducting due diligence. We also met with a retired ex-deputy governor of the RBI at our headquarters in Salt Lake City. One of the main takeaways from the meeting was the significance of the inflation-targeting regime established by prior RBI governor Raghuram Rajan. The RBI Act of 1934 was amended in 2016 to make price stability a primary objective of monetary policy and to incorporate Mr. Rajan’s inflation targets into India’s constitution. Although we continue to investigate the situation, we think the likelihood of the RBI losing its mandate to keep inflation within the currently targeted range is small.

Through our lens, the extent to which Mr. Modi’s ruling coalition can retain or expand power in the upcoming general election carries a greater level of uncertainty. Following high-profile defeats of Mr. Modi’s Bharatiya Janata Party (BJP) in provincial elections in Rajasthan, Madhya Pradesh and Chhattisgarh in December, the outcome in 2019 may hinge upon the ability of opposing parties to present a united front. An expanded majority for the BJP in the lower house of parliament would make it easier for the Modi government to push through additional business-friendly reforms. However, a reduced majority sufficient to block the reversal of key reforms already in place may be enough to satisfy investors and keep India’s economic development on track.

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.

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.

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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