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

Investor Class | Institutional Class
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Q2 2018
Indian Equities Sidestepped Much of the Pain Felt in Emerging Markets
by Ajay Krishnan, CFA and Matthew Dreith, CFA

“Investors reckoned that massive and growing domestic demand for Indian products would help to insulate the economy from trade risks.”

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.

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For the period ended June 30, 2018, the average annual total return of the Wasatch Emerging India Fund for the 1-year, 5-year and since inception periods were 9.36%, 18.87% and 12.13%. The returns for the MSCI India IMI Index were 4.90%, 10.35% and 2.65% respectively. Expense ratio: Gross 1.73% / Net 1.73%.  

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.

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Overview

During the second quarter, the benchmark MSCI India Investable Market Index (IMI) posted a loss of -2.23%. Surpassing its benchmark, the Wasatch Emerging India Fund—Investor Class rose 0.23%. The mixed returns masked underlying strength in India’s major stock averages, which finished with quarterly gains in local-currency terms. Returns measured in U.S. dollars were lower, as the greenback’s appreciation of 5.1% against the rupee cut dollar-equivalent prices of rupee-denominated assets.

Escalating fears of a global trade war dampened enthusiasm for emerging-market assets already under pressure from rising U.S. interest rates and a stronger dollar. Even so, sustained local inflows supported India’s stock market. Investors reckoned that massive and growing domestic demand for Indian products would help to insulate the economy from trade risks. Indian equities got an additional boost from hopes that increased government spending ahead of next year’s elections would feed through to corporate earnings.

Disruptions from the nationwide goods-and-services tax (GST) implemented last year continued to fade, fueling a pickup in economic growth. According to government data released in May, India retained its status as the world’s fastest-growing major economy. Gross domestic product (GDP) growth of 7.7% during the January-to-March quarter was India’s most rapid since the government banned high-denomination currency notes in 2016.

Currency weakness and higher oil prices stoked fears of inflation in India and a number of other developing nations. Because India imports around 80% of its oil, the rising price of crude caused the country’s current-account deficit to widen, further pressuring the rupee. Citing stronger economic growth and building inflationary pressures, the Reserve Bank of India (RBI) raised its repurchase rate for the first time since 2014. RBI governor Dr. Urjit Patel called on the U.S. Federal Reserve to slow its pace of monetary tightening to help emerging economies cope with the fallout.

The Fund’s largest source of outperformance relative to the benchmark was the consumer-discretionary sector, followed by financials. The Fund generated gains in these sectors that compared favorably to losses in the benchmark’s corresponding positions. Information technology (IT), the top-performing sector of the Index, was a source of weakness for the Fund. The Fund’s IT stocks lagged the IT positions in the benchmark, and our underweight exposure to this sector was a headwind to performance.

Details of the Quarter

The strongest contributor to Fund performance for the quarter was V-Mart Retail Ltd. The company operates department stores specializing in apparel. V-Mart also sells a wide range of general merchandise and fast-moving consumer goods. Profit after tax soared 147% in the company’s most-recently reported quarter on revenue growth of 18.1% versus the same quarter last year. Because V-Mart operates primarily in India’s rural areas, the company stands to benefit as the Modi government seeks to create jobs and appeal to voters in advance of national elections in 2019.

Bajaj Finance Ltd. was the second-best contributor to performance. An Indian non-bank financial company, Bajaj offers a broad spectrum of lending services. After-tax profit jumped 60.5% year-over-year in the company’s most-recent quarter as improved asset quality led to lower loan-loss provisions. Revenue at Bajaj increased 33.2%, and new loans rose 51% during the period. Assets under management increased 40%, driven by the consumer, rural and commercial segments. Management said it plans to increase the company’s footprint from 1,332 locations to 1,550 locations over the next 12 months.

Third-largest contributor Page Industries Ltd. is a consumer-discretionary holding. The company manufactures and sells undergarments using the Jockey brand in India. Rising household incomes, especially in rural areas, have increased demand for the products Page offers. Profit after tax rose 41% year-over-year in the company’s most-recent quarter on 22% revenue growth. Like V-Mart, Page is expected to benefit from increased government stimulus tied to next year’s general elections.

The greatest detractor from Fund performance for the quarter was Amara Raja Batteries Ltd. The company makes lead-acid storage batteries for industrial and automotive applications. Higher costs for lead and other raw materials squeezed margins in Amara Raja’s most-recent quarter. Uncertainty about future Indian government policy with respect to electric vehicles (EVs) also appears to have weighed on the company’s share price. The reason EV progression is perceived as a threat is that the progression would require conventional battery companies like Amara Raja to manufacture different types of batteries that are suitable for EVs.

We think these concerns are overdone and continue to own the stock in the Fund. Amara Raja’s recent price hike should offset increased lead costs, which already have declined from their highs of early February. While the risks posed by EVs are real, we believe India’s government currently lacks the resources necessary to subsidize rapid adoption of EV technology.

Another industrial holding, Somany Ceramics Ltd., was the second-largest detractor. The company makes and sells wall and floor tiles, sanitary ware and bath fittings. Although comparable sales rose 2.3% in Somany’s most-recently reported quarter, profit after tax fell -7.2% from the year-ago period. Management cited higher prices for natural gas and ongoing pricing pressure from competitors using dubious means to avoid India’s GST. The company expects the e-way bill to curb non-compliance with the GST and create fairer competition in the industry.

Gulf Oil Lubricants India Ltd. was the third-largest detractor from Fund performance. The company offers automotive and industrial lubricants and greases. Shares of Gulf India declined modestly in local-currency terms during the second quarter amid worries that the rising price of crude oil may hurt the company’s profitability. We think Gulf India may benefit in the long run, however, as it passes along its higher costs to customers and then maintains those higher prices after the cost of crude declines. (Current and future holdings are subject to risk.)

Outlook

With July 1st marking the one-year anniversary of the GST, economic dislocations stemming from enactment of the tax have largely proven temporary. Goods are flowing more freely, supply chains have become more efficient and tax compliance has been streamlined. We expect several companies owned in the Fund to gain market share as improved enforcement of the GST drives informal players out of their industries.

Although Prime Minister Narendra Modi’s ban on high-denomination bank notes in 2016 is typically viewed as one of his government’s less-successful reform efforts, the program of demonetization did succeed in one key respect: Substantial amounts of unaccounted cash (or “black money”) found their way into India’s financial system, including mutual funds and the stock market. During the second quarter, local inflows underpinned support for Indian equities at a time when global investors were becoming more-selective with their emerging-market investments.

Other recent reforms designed to further India’s financial development include the Modi government’s overhaul of the country’s bankruptcy process. The Insolvency and Bankruptcy Code 2016 established special courts to speed up the winding down of troubled companies. By resolving bankruptcy cases faster, the new law has enabled the courts to return the assets of bankrupt entities more quickly to productive uses.

Of the $210 billion in soured loans currently clogging India’s banking system, about 90% are held by state-owned banks. In an effort to get credit flowing to worthy borrowers, the RBI has been pressuring state lenders to recognize non-performing loans and cut off credit to companies in default. Meanwhile, private banks continue to take market share from India’s state-owned banks (also known as public-sector undertakings or “PSU banks”). In addition to serving as an investment theme for the Fund, this process should lead to more-efficient allocation of credit and higher-quality economic growth over time.

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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