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

Investor Class | Institutional Class
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Q1 2018
Fund Outperformed as Volatility Returned to the Global Equity Markets

“A number of political or economic events (such as tighter global monetary policy) could increase volatility in the world’s equity markets, but current conditions, including healthy global growth and accommodative monetary policy, generally seem supportive.”

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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 Opportunities Fund for the one-, five-, and ten-year periods were 21.08%, 10.36%, and 9.14%. 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 2.24% / Net 2.24%.


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 Opportunities Fund—Investor Class gained 1.72% for the first calendar quarter of 2018, outperforming the benchmark MSCI ACWI (All Country World Index) ex USA Small Cap Index, which was down -0.35%. For the 12 months ended March 31, 2018, the Fund’s 21.08% gain beat the 20.60% return of the Index.

Global equity markets largely continued their upward trend as 2018 kicked off. The U.S. dollar hit a three-year low against the euro as the eurozone recovery continued to strengthen. In January, a composite purchasing managers’ index for the eurozone showed business activity increasing faster than at any time in nearly a decade and consumer confidence reached its highest point in 17 years. Investors are continuing to keep a close eye on the European Central Bank’s (ECB’s) monetary policy, awaiting hints of plans to withdraw stimulus, but inflation remains stubbornly below ECB targets.

At the beginning of February, global markets saw volatility abruptly return. Stocks fell sharply then promptly recovered with the support of strong macroeconomic data and optimism around the effects of corporate tax cuts in the U.S. For example, China’s government reported that annual gross domestic product (GDP) growth rose to 6.9% in 2017. The fact that China’s growth has remained resilient in the face of a push by the authorities to rein in loan growth has increased confidence in the country’s ability to grow out of its recent debt accumulation. Inflation in other emerging countries has been trending down, highlighting a process of convergence between the emerging and developed world.

Toward the end of the quarter, global financial markets reacted negatively to President Trump’s sudden announcement of new tariffs on steel and aluminum imports as well as separate measures directed specifically at China. But as fears of a resulting trade war subsided, markets once again rebounded on hopes of a negotiated resolution.

The health-care and information-technology (IT) sectors were the biggest contributors to the Index’s return during the first quarter, while cyclical sectors like materials, industrials, consumer discretionary and energy were the largest detractors.

Details of the Quarter


Within the Index, emerging markets were up slightly while developed markets saw a loss during the quarter, though both have returned close to the overall benchmark’s 20% return over the last 12 months.

It is important to remind shareholders that although returns between emerging-market and developed-market stocks can and do differ at times, stocks generally don’t move in big monolithic entities called “emerging” and “developed.” Within the Fund, our developed-market holdings contributed more to our outperformance of the benchmark than our emerging-market holdings, but that was solely because of the strong performance of our Japanese stocks relative to their benchmark counterparts. In fact, four of the five countries that added the most to the Fund’s return for the quarter were considered emerging markets, and four of the five countries that subtracted the most from the Fund’s return were developed markets. Because performance can vary greatly between markets for a number of reasons, country diversification is an important way we seek to manage risk in the Fund, especially since we are focused on micro caps.

Outside of Japan, China was the top-contributing country in the benchmark, and although the Fund’s weight in China is less than half of the Index’s, one of our Chinese holdings, food-seasoning manufacturer Yihai International Holding Ltd., was up over 59% during the quarter and contributed significantly to the Fund’s return and outperformance of the benchmark in China. Yihai is one of the major suppliers of China’s famous Haidilao “Hot Pot” restaurants. The company sells its proprietary seasonings across 31 provinces in China as well as in over 20 countries world-wide.

The Fund underperformed the benchmark in South Korea primarily due to the poor showing of TES Co. Ltd. TES is an equipment manufacturer for the semiconductor industry. Despite strong order and earnings growth for the company, some investors have been concerned about whether future demand in this relatively cyclical industry will be enough to continue to drive the high levels of growth that the company has seen over the last couple of years. We believe strong order momentum should persist driven by ongoing customer demand for the equipment TES makes.

Like it was for all of 2017, Japan was the Fund’s top contributor to performance versus the Index on a country basis. Japan is the largest country weighting in the Fund because we have been finding exciting companies that meet our criteria for quality and growth. The Fund’s results in Japan were led by internet software stars SMS Co. Ltd., a provider of recruitment services and software for the health-care market, and Infomart Corp., operator of an online platform that allows restaurants, food-service companies and wholesalers to order online from Infomart’s wholesalers, and M&A Capital Partners Co. Ltd., an advisory firm for mergers and acquisitions.

Given the amount of ongoing structural change in the country, our team thought it worth our time to travel to Japan again during the quarter to meet with management teams and get an on-the-ground feel for the macro environment in which our companies operate. In two weeks, our team met with the executives of dozens of micro-cap companies, including some new ones we had not met before. While our visit led to a few adjustments within the Fund, we are generally pretty optimistic about our current Japanese holdings and the opportunities they represent.

Thanks to Qualitas Controladora S.A.B. de C.V., the leading auto insurer in the country, Mexico was the next-largest contributor to the Fund’s outperformance of the Index, followed by Taiwan, which benefited from an outsized return from consumer goods manufacturer TCI Co. Ltd., which was up nearly 46% for the quarter. TCI primarily sells on a wholesale basis to direct marketing firms in China, where demand for its high-end consumer products continues to see strong growth amidst a supportive economic environment.

The biggest detractors from the Fund’s performance versus the Index during the quarter were the United Kingdom, Germany, Australia and India. The negative overall return for each of these countries was primarily driven by a handful of poor-performing stocks. The biggest detractor in the U.K. was Horizon Discovery Group plc, which saw the CEO announce his departure during the quarter. Despite this unexpected announcement, we believe the company, which supplies products to the research, biopharma and diagnostics segments of the life sciences tools and services industry, seems to be well-positioned given the trend toward personalized medicine, which appears to have significant headroom for growth. In Germany, industrial automation system manufacturer Isra Vision AG was the largest detractor, despite its track record of steady growth across a number of industrial end markets, which we believe will continue. In Australia, skin care products company BWX Ltd. is a fairly recent addition to the Fund. The company’s disappointing results during the quarter led some analysts to question its acquisition strategy, but in our view, BWX is still seeing strong global demand for its natural products and should benefit from global consumption trends if the company can successfully execute its increasingly global strategy. Finally, in India, the expected business turnaround of integrated logistics company Allcargo Logistics Ltd. failed to materialize. As a result, the company was a drag on the Fund’s performance for the quarter.


On a sector basis, consumer staples was the largest contributor to the Fund’s outperformance of the benchmark. Our consumer-staples stocks returned 10.2% compared to just 0.5% for their benchmark peers. Outperformance was driven by several of the Fund’s holdings, including Japanese food and drug retailers Yakuodo Co. Ltd. and Kusuri no Aoki Holdings Co. Ltd., as well as previously mentioned food manufacturers Yihai in China and TCI in Taiwan.

Our IT names also performed better than their benchmark peers, and the Fund’s large average weight (22.1% versus the benchmark weight of 12%) benefited relative performance. Japanese names SMS and Infomart, mentioned earlier, and IT consultant Rakus Co. Ltd. were the Fund’s largest contributors to IT-sector performance.

Health care was one of the best-performing sectors in the Index during the quarter. Our health-care stocks declined and underperformed those in the Index primarily due to Horizon Discovery, mentioned earlier, which was the Fund’s largest detractor from performance.

The Fund’s materials stocks were also down for the quarter, but our underweight position in this poor-performing sector of the Index offset some of the effect on relative performance. The sagging performance of our chemical-industry holdings in India was mainly responsible. The largest detractors within the industry were Supreme Industries Ltd., Gulf Oil Lubricants India Ltd. and Berger Paints India Ltd. Though these companies have seen some headwinds as consumers adjust to India’s recently enacted goods-and-services tax (GST), we are still optimistic about their long-term growth opportunities. (Current and future holdings are subject to risk.)


We believe the Fund is well-positioned across global markets. While returns of our Japanese stocks drove a good portion of the Fund’s return over the last year, we are also optimistic about opportunities we see in other countries, both developed (like western Europe) and emerging (where we see relatively attractive valuations).

We recently increased our exposure to South Korea, for example, after members of team traveled to the country for research. Not only have we been seeing a growing number of interesting Korean micro-cap companies appearing in our discovery process, but we see a steady economic backdrop driven by healthy global demand and a domestic market buoyed by continuing fiscal and monetary support.

Like Japan, India is also undergoing a structural transition. Despite what we believe will be short-term disruptions stemming from the GST, we also see India as offering significant long-term potential for us as micro-cap investors. India remains a substantial weight in the Fund, and we are content with that exposure given the opportunities we have been seeing at the company level and the initiatives that are being undertaken by the government.

As we’ve indicated in the past, a number of political or economic events (such as tighter global monetary policy) could increase volatility in the world’s equity markets, but current conditions, including healthy global growth and accommodative monetary policy, generally seem supportive. In managing the Fund, we do our best to mitigate unforeseen risks by using in-depth research to find what we believe to be the highest-quality micro-cap companies wherever they may be in the world.

Thank you for the opportunity to manage your assets.


Jared Whatcott, Linda Lasater and Allison He



**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)

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The Wasatch International Opportunities Fund’s investment objective is long-term growth of capital.

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

A 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.

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.

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