Wasatch International Opportunities Fund® (WAIOX)  Invest in this Fund 

Investor Class | Institutional Class
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Q4 2017
Fund Produced Strong Results for the Fourth Quarter and Year

“We continue to be positive on the investment outlook for a majority of the markets in our universe and are confident in the Fund’s current positioning.”

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For the period ended December 31, 2017, the average annual total returns of the Wasatch International Opportunities Fund for the one-, five-, and ten-year periods were 27.59%, 12.36%, and 7.07%. 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 2.22% / Net 2.22%.

 

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 Opportunities Fund—Investor Class returned 7.36% for the fourth quarter and 27.59% for year ended December 31, 2017, while the benchmark MSCI ACWI (All Country World Index) ex USA Small Cap Index returned 6.56% and 31.65% over the same time periods, 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. Emerging markets made a strong recovery as currencies stabilized and investors returned to developing nations.

In the fourth quarter, quality and growth stocks continued to outperform with sectors including information technology, consumer staples, health care and consumer discretionary seeing strong performance, while more cyclical sectors including energy, financials, utilities and industrials lagged within the benchmark.

Details of the Year and Quarter

Countries

Developed and emerging markets within the Index performed strongly both returning over 30% for the 12-month period. While the Fund’s developed-market performance bested the benchmark’s with a return of nearly 45%, our emerging-market holdings lagged. After years of stagnation, emerging-market stocks staged a strong recovery in 2017, but many of our names just didn’t participate in the rally.

Japan, the Fund’s largest country weighting at approximately 25%, was the top-contributing country in 2017 and for the fourth quarter. The Fund’s holdings in Japan returned over 65% and outperformed their benchmark counterparts by a wide margin in 2017. In the fourth quarter, our holdings returned 18% outperforming the benchmark’s return of 9%.

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.

Open Door, Inc. was the top contributor for the year and quarter, gaining over 150% and over 65%, respectively. The company operates a travel comparison website in Japan. Given how well kayak.com has done in the U.S., we believe Open Door’s headroom for growth is huge. The company was the first to market and has built up a brand name, network effects and scale.

Yume No Machi Souzou Iinkai Co. Ltd. was also one of the portfolio’s top contributors for the year and quarter, up over 200% and 20%, respectively. Yume is the leading restaurant food delivery company in Japan. This is a burgeoning industry with potentially massive headroom. The company has a first-to-market advantage and is quickly building scale and network effects.

M&A Capital Partners Co. Ltd., a provider of merger and acquisition services to small and medium-size enterprises, and Kotobuki Spirits Co. Ltd., which manufactures and sells confectionery products, were also solid contributors for the year and quarter.

Gurunavi, Inc. was the largest detractor from the Fund’s performance for the year. The company 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 a loss of confidence in Gurunavi. We have since exited our position.

The Fund also had good performance in Western Europe for the 12-month period, particularly Germany and the United Kingdom. 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 been increasing after years of underinvestment and economic indicators have continued to improve. Major elections in the Netherlands, France and Germany supported markets with no major unexpected shifts in policy. In Germany, our holdings returned 80% compared to the 57% return of their benchmark counterparts. The Fund’s return from Germany was driven by ISRA Vision AG, a developer of software and equipment for machine vision used in industrial manufacturing, and Hypoport AG, an online financial intermediary operating the largest electronic market place for financial products in Germany.

Interestingly, the U.K. was the Fund’s third-largest country contributor for the year, despite ambiguity surrounding ongoing Brexit negotiations. The Fund’s U.K. holdings returned about 50% against the benchmark’s 32.5%. In the second half of 2017, the U.K. market began to weaken as consumer sentiment was poor and pressures from cost inflation began affecting companies’ earnings. Most of our U.K. holdings derive a majority of their revenues internationally, which we believe somewhat insulates them from the uncertainty surrounding Brexit. For the year, our largest contributors in the U.K. were Smart Metering Systems plc, which manages smart meters on behalf of utility companies, and GB Group plc, a global specialist in identity data intelligence.

Pakistan was one of the Fund’s largest detractors on a country basis for the fourth quarter and for the year. During 2017, the overall equity market faced a challenging environment as MSCI upgraded Pakistan from the MSCI Frontier Market Index to the MSCI Emerging Markets Index. Institutional investors abandoned the country, as its weight became an insignificant part of the MSCI Emerging Markets Index. On the back of the technical realignment of the MSCI benchmarks, Pakistan faced a political crisis and Pakistan’s largest bank was embroiled in violations of anti-money laundering regulations. Hascol Petroleum Ltd. and Pak Elektron Ltd. were large detractors from performance for the year. Hascol Petroleum engages in the purchase, storage and sale of petroleum products in Pakistan. We believe the company’s fundamentals remain intact as it continues to see strong volume growth from new distribution customers and further retail outlet growth. Pak Elektron is the only listed producer of white goods and power transformers in Pakistan. While recent meetings with management confirmed the headroom and growth opportunity available to the company, we made the decision to exit this small position due to higher-than-expected competitive risks.

Brazil was the largest detractor from the Fund’s fourth quarter performance as Wiz Solucoes e Corretagem de Seguros S.A., an insurance-brokerage firm in Brazil, weighed on performance. Imminent renegotiations of its exclusivity contract with Caixa Seguridade†† have resulted future uncertainty.

Canada also weighed heavily on the Fund in 2017 primarily due to Badger Daylighting Ltd., the Fund’s second-largest detractor. Badger Daylighting, operates roughly 1,000 hydrovac trucks throughout Canada and the U.S. Hydrovac excavating is primarily used to dig trenches to access existing underground pipes or lay down new pipes, and is safer than digging by hand or using a digger. Badger Daylighting’s business is primarily driven by the oil and gas industry and the utilities sector. The company’s earnings came in below expectations earlier in the year, while at the same time a well-known short-seller attacked the stock. We believed that the margin decline was due to heavy expenses incurred to make Badger a more sustainable business. However, these increased expenses were poorly communicated to investors. We lost confidence in the management team and sold the stock.

Sectors

In the fourth quarter, we saw a marked underperformance by more cyclical sectors including energy, financials, industrials and real estate in both the Fund and the benchmark. For the year, sectors that were notable detractors from the Fund’s performance relative to the benchmark were health care, industrials, information technology and consumer staples. We outperformed the benchmark in the financials, energy, real-estate and consumer-discretionary sectors. We ended the year with no holdings in the energy sector and had no exposure to the utilities or telecommunication-services sectors.

Within the consumer-discretionary and consumer-staples sectors, Open Door, Yume No Machi and Kotobuki Spirits were our largest contributors for 2017. In information technology, Isra Vision, mentioned earlier, and Advanced Ceramic X Corp. (Taiwan) drove performance. Advanced Ceramic manufactures multilayer devices of low-temperature co-fired ceramic devices and modules for wireless-communication applications.

RaySearch Laboratories AB (Sweden) weighed on the Fund’s performance in the health-care sector. RaySearch develops software for cancer radiation therapy. Order intake declined unexpectedly and the company accelerated major investments in research and development and in the sales and support organization, which affected earnings. (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 Fund’s current positioning. 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.

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, and we have been seeing strength from the bottom-up with earnings coming through at the company level. 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.

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 as capital investments increase after years of underinvestment and economic indicators have continued to improve. Stock valuations have risen, but we believe the economic expansion could last longer than expected and drive strong earnings growth for companies over a multi-year period.

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,

Jared Whatcott 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 Opportunities Fund’s investment objective is long-term growth of capital.

††As of December 31, 2017, the Wasatch International Opportunities Fund was not invested in Caixa Seguridade Participacoes S.A.

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 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.   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.  

You cannot invest directly in indexes.

View the International Opportunities 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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