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

Investor Class | Institutional Class
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3Q18
Fund Outperformed in a Market Environment Fraught With Volatility

“While risks to the global economy include the potential for further escalation in trade tensions between the U.S. and China and ongoing currency volatility in emerging markets, we are continually impressed with the strong management teams of the companies in which we invest. We are optimistic that they will continue to find ways to help their companies thrive and succeed across various market conditions.”

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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 September 30, 2018, the average annual total returns of the Wasatch International Opportunities Fund for the one-, five-, and ten-year periods were 10.45%, 10.00%, and 13.35%. The returns for the MSCI AC World Ex-U.S.A. Small Cap Index were 1.86%, 6.14%, and 8.73%. Expense ratio: Gross 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.

OVERVIEW

The Wasatch International Opportunities Fund—Investor Class returned 0.85% in the third quarter of 2018, again outperforming the MSCI ACWI (All Country World Index) ex USA Small Cap Index, which fell -1.51%.

The third quarter of the year saw continued pressure on emerging-market stocks from ongoing global trade concerns and worries over the vulnerability of some economies to tighter U.S. monetary policy. As Federal Reserve (Fed) officials continue to gradually raise interest rates and unwind the Fed’s balance sheet, emerging-market countries that have large dollar-denominated debt loads and expanding current-account deficits are not seeing an easy way out. Countries that have had to defend their currencies and control inflation by raising interest rates have been especially vulnerable. To further compound matters, countries that rely on imported oil have been seeing imports cost more in local-currency terms as oil prices have risen. This is especially true for countries that have lately experienced significant currency depreciation.

To the relief of emerging-market countries that depend on Chinese demand, China’s leaders are looking at easing monetary policy to support domestic growth in light of tariffs on Chinese imports being imposed by the U.S. This followed Chinese government action to slow the pace of non-bank credit growth.

Developed markets did not escape the quarter unscathed. In the United Kingdom, equities were weighed down by increasing fears of a “no deal” Brexit. In Europe, manufacturing has seen weakening in new export orders (especially to China) since the beginning of the year. Falling unemployment has helped support domestic consumption, but consumer confidence continued to trend down across the continent.

Japan’s economy seems to have stabilized, yet inflation, as measured by the consumer-price index excluding fresh food and energy, remains stubbornly low. The country has been seeing a rebound in wage growth, and it also has had more job openings per applicant than at any point since 1974. The depreciation of the yen, aided by the rising interest-rate differential, also supported Japanese equities during the quarter.

DETAILS OF THE QUARTER

COUNTRIES

In the MSCI ACWI ex USA Small Cap Index, both developed and emerging markets were down during the quarter, though emerging markets struggled even more as a result of the factors previously mentioned. The Fund outperformed its benchmark due to the better performance of the companies in which we invested.

Japan and Australia were the Fund’s top-contributing countries this quarter. Not only was the Fund slightly overweight in both of these countries, but our holdings significantly outperformed the benchmark’s corresponding country positions.

After a weak showing in the second quarter, the stock of Australian company Pro Medicus Ltd. saw a strong rebound in the third quarter and was the Fund’s top contributor for the period. Pro Medicus provides enterprise medical imaging and radiology information systems to medical groups like the Mayo Clinic, Mercyhealth, WellSpan Health and Sutter Health. The company continued to see strong fundamental growth.

Webjet Ltd. was another top contributor from Australia. The company operates the top online travel agency (OTA)—webjet.com—in Australia. Over the last few years, Webjet has been expanding into the business-to-business (B2B) travel segment with WebBeds, which offers wholesale rates on hotel rooms to its clients (OTAs, wholesalers, retail agents and tour operators). Last year, the company purchased JacTravel, helping Webjet to become the second-largest online hotel wholesaler in a large and fragmented market. With less than 2% market share, we believe Webjet still has ample headroom for growth in this market.

In Japan, online travel-comparison website Open Door, Inc. and online food-delivery company Yume No Machi Souzou Inkai Co. Ltd. were the Fund’s second- and third-best contributors for the quarter. As these two online companies continue to take market share from more-traditional competitors, investors are increasingly taking notice of their headroom for growth and their quality. Over the past two years, the stocks of these two companies alone added over five percentage points to the Fund’s performance.

On the flip side, long-term holding M&A Capital Partners was a significant detractor this quarter on concerns over a slowdown in mergers and acquisitions in Japan. Despite being one of the quarter’s biggest detractors, M&A Capital’s stock was up over 175% for the 24 months ended September 30, 2018.

We parted ways with another long-time Japanese holding in the quarter as we sold 100-yen store Seria Co. Ltd. With the stock trading at a lofty valuation, we were having a harder time penciling out returns high enough to justify continuing to hold this $2.7 billion market-cap company. Wasatch first invested in Seria nearly six years ago when it had a market capitalization of under $700 million. Seria detracted from performance for the quarter.

Finally, China also made a strong contribution to performance for the quarter. Our lone Chinese stock, Yihai International Holdings Ltd., benefited from the initial public offering (IPO) of its former parent and largest customer, Haidilao International Holding Ltd., one of China’s most-popular hotpot restaurant chains. Yihai manufactures and sells hotpot soup flavorings, hotpot dipping sauces and Chinese-style compound condiments under the Haidilao brand name. Yihai’s stock was up more than 185% for the 12 months ended September 30th.

On the downside, the Philippines, India and the United Kingdom were among the Fund’s largest detractors.

Philippine Seven Corp., the 7-Eleven master franchisee in the Philippines, was the largest detractor from the Fund’s performance for the quarter. Local funds bid the stock up quite aggressively at the end of the second quarter. It then retraced its performance in the third quarter with a decline of over 30%. We believe the long-term health of the company is intact. Operationally, Philippine Seven continues to dominate the convenience-store segment in the Philippines and so far this year the company’s growth has been accelerating.

Among the countries in which the Fund is invested, our position in India is the most overweight relative to the benchmark, so the poor performance of Indian equities (along with the rupee’s depreciation against the U.S. dollar) detracted from performance. The Fund’s Indian holdings slightly underperformed the India component of the benchmark mainly due to lagging performance among our Indian materials names.

Although the United Kingdom subtracted a small amount from the Fund’s return, our holdings in the U.K. outperformed their benchmark counterparts and our slightly underweight position aided relative performance. Nevertheless, two U.K. industrial names, Clipper Logistics plc and Smart Metering Systems plc, were substantial detractors from Fund performance. Clipper Logistics, a non-food retail supply chain logistics operator, with a strong focus on e-fulfillment and return services, tempered their forward growth expectations given the U.K. retail environment. While the fundamentals of Smart Metering Systems have largely held up to our expectations, the company’s stock has been weak this year on concerns that government programs to install smart meters around the country may slow.

SECTORS

From a sector standpoint, financials and health care added the most to the Fund’s return and we outperformed the benchmark in these sectors.

Within financials, consumer-related finance names ASA International Group plc and Hypoport AG were among the top contributors. On a recent trip to Germany, members of the Wasatch international team spent an afternoon with the CEO and other senior executives of Hypoport near Munich. We also visited one of the company’s Dr. Klein sites to better understand how financial advisors use Europace, a business-to-business (B2B) financial marketplace, and interact with customers. Hypoport is a financial-technology (fin-tech) company that has created a successful B2B mortgage marketplace. The company’s vision is to become a broader online financial-services platform by replicating its success in related industries such as insurance and other real-estate services.

ASA International is a leading micro-finance lender with operations spanning Asia and Africa. The company had its initial public offering earlier this year. The company spun out of ASA NGO (non-governmental organization) Bangladesh that is a pioneer in the realm of micro-finance lending to individual female entrepreneurs. ASA’s model was widely adopted across India, where it has created more than a few multi-billion dollar businesses. As investors with a long track record in India, and familiarity with this business model, we quickly recognized that ASA International had the right ingredients for success. The company operates in a variety of key geographies that we believe give it exposure to the right customer profiles and help mitigate geographic-concentration risk.

The Fund’s performance in the health-care sector was driven primarily by the strong return of Australian health-care equipment provider Pro Medicus (mentioned above).

The materials sector subtracted the most, though less than half a percentage point, from the Fund’s return and we underperformed the benchmark in the sector. Within the sector, the Fund’s largest detractors for the quarter were Indian companies Supreme Industries Ltd. and Gulf Oil Lubricants India Ltd. In addition to being affected by the rupee’s depreciation, the stock of Supreme Industries was down on concerns that higher oil prices may squeeze profit margins on the plastic products the company makes. While Gulf Oil Lubricants has continued to benefit from growth driven by increasing use of its lubricants for automotive and industrial applications, investors have grown concerned that raising prices to pass on increasing input costs may result in slower volume growth. (Current and future holdings are subject to risk.)

OUTLOOK

We continue to be excited about the opportunities we are seeing in international micro-cap companies. While risks to the global economy include the potential for further escalation in trade tensions between the U.S. and China and ongoing currency volatility in emerging markets, we are continually impressed with the strong management teams of the companies in which we invest. We are optimistic that they will continue to find ways to help their companies thrive and succeed across various market conditions.

Despite recent weakness, we continue to be constructive on the long-term opportunities in the emerging economies of the world. Our investments in emerging markets are the result of bottom-up research into the prospects of individual companies rather than target allocations to these markets. Our research has uncovered a number of promising micro-cap opportunities in developing markets that we believe have the potential to contribute to the Fund’s success going forward.

Our confidence, of course, comes from our experience with our trusted process. As we continue to travel the planet, we search for growing micro-cap companies in developed and emerging markets that we see as being of the highest quality.

Thank you for the opportunity to manage your assets.

Sincerely,

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)

CFA® is a trademark owned by CFA Institute.

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

††As of September 30, 2018, the Wasatch International Opportunities Fund was not invested in Haidilao International Holding Ltd.

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.

A Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. The CPI is calculated by taking price changes for each item in the predetermined basket of goods and averaging them. The goods are weighted according to their importance.

An initial public offering (IPO) is a company’s first sale of stock to the public.

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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