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

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Q2 2015
Separating Fact From Illusion in a Magical, Bubble Quarter

“Our job as long-term investors is to analyze the fundamentals of companies and to separate the illusion—the magic of the markets—from the facts we see on the ground.”

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For the period ended June 30, 2015, the average annual total returns of the Wasatch International Opportunities Fund for the one-, five-, and ten-year periods were 4.67%, 13.37%, and 10.54%. The returns for the MSCI AC World Ex-U.S.A. Small Cap Index were -3.07%, 9.72%, and 7.39%. Expense ratio: Gross 2.41% / Net 2.25%.


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 gained 3.19% in the second quarter of 2015. Although the Fund underperformed its benchmark, the MSCI All Country (AC) World Ex-U.S.A. Small Cap Index, which rose 4.22%, we held up relatively well in the face of a strong and what we see as an irrational rally. In the 12 months through the end of May, the combined market cap of Chinese equities had risen by US$6 trillion to US$11.5 trillion. On paper, that would buy the gross domestic product (GDP) of over three Indias, the 19 largest stocks in the world, and Germany’s stock market three times over. Of course, again this is paper wealth—a circus style illusion—and at the end of the day, there is absolutely no reason an umbrella company—not a holding company but a company that simply sells umbrellas to shelter us from the rain—should sell at a market capitalization of almost US$3.3 billion at the peak of this rally. It would take a lot of umbrella sales into perpetuity to justify that valuation.‡‡ As investors in what we consider to be high-quality companies, it is very difficult for us to sit back in the face of technical momentum, but in assessing individual stocks, we see no reason for this type of rally to continue. It was a fantastic, magical bubble quarter—one where in the USA a handful of private businesses dazzled us by reaching magical unicorn valuations. In China, even an umbrella company could mesmerize us with higher and higher trapeze act prices. Of course, in investing there are no safety nets to protect us when the performer falls off the trapeze or stumbles on the tightrope, and as we all know, the show almost never goes on. So, rather than be caught up in the circus, we continued to focus on quality and fundamentals. For the six months ended June 30, 2015, the Fund gained 8.58% and outperformed the benchmark, which gained 8.32%. More importantly, we believe we have a well-structured portfolio for long-term investors—one we believe will do well when the circus leaves town.

Details of the Quarter

There’s a great biography of Phineas Taylor “P.T.” Barnum on the Ringling Bros. website. P.T. Barnum, was famously credited with the saying “There’s a sucker born every minute.” There is no proof that he said this, but he did say, “Every crowd has a silver lining,” and also believed that “The public is wiser than many imagine.” According to the website, in his 80 years, Barnum gave the wise public of the 19th century shameless hucksterism, peerless spectacle, and everything in between—enough entertainment to earn the title “master showman” a dozen times over. In choosing Barnum as one of the 100 most important people of the millennium, LIFE magazine dubbed him “The patron saint of promoters.” We bring up P.T. Barnum’s showmanship because we still believe the world’s central bankers have been giving us a global three-ring circus. This quarter, as China moved to prop up its economy and keep deflation from setting in, there were some extremely erratic movements in stock markets. We looked for good stocks in the Chinese market. We own a few stocks in China, but at present we see the best opportunities for long-term investors in Japan. We spent three weeks in Japan during the quarter assessing the changes at the macroeconomic and corporate level. We believe we can find good companies at reasonable valuations in Japan. That is where we have been investing shareholder capital more aggressively based on our long-term approach.

As for specific performance this quarter, there were a handful of stocks that lost 20% to 30% that hurt us in several sectors. The biggest detractor from the Fund’s performance relative to the Index was the general underperformance of some of our overweight markets, in particular India, Malaysia and Indonesia. Our low exposure to the United Kingdom (U.K.), a strong-performing market in the quarter, also hurt, as did our dramatically underweight position in China.

On the positive side, our stock picks in Taiwan, Japan and Turkey soundly beat their Index counterparts, and together added 2.25 percentage points of outperformance versus the Index.

Overall, the Fund has performed as we would expect during the uncertain markets of the past few months. It slightly underperformed when the markets were ripping to new highs (where indebted companies and those with higher valuations often led the way). The Fund tended to outperform when the markets plunged (a characteristic we attribute to the high-quality nature of the stocks in the portfolio). For example, the Fund trailed the benchmark by an even greater margin at the beginning of the second quarter when stocks in countries like China and India soared to new expensive levels. These stocks fell back as the quarter progressed. The China component of the Index, for example, fell 12% just in June, which helped the Fund quickly gain back much of its underperformance. China continued to fall aggressively as we entered the third quarter. We believe many of the changes going on within China are good. China seems to be focusing on more controlled, but higher-quality, more durable growth than what we have seen in the past. Still, it doesn’t change the fact that it is difficult to find companies in the Chinese market that have reasonable valuations or sustainable competitive advantages. So, to describe this rally, the words of Billy Rose and E.Y. “Yip” Harburg seem appropriate. The rally was “only a paper moon, sailing over a cardboard sea, but it wouldn’t be make-believe if you believed in me.” Changes in economies and markets need to be driven top down and bottom up like what we are seeing happen in Japan. What was happening in China with paper wealth magically created (and a good deal of it with leverage) couldn’t continue, and it didn’t. We are not heavily invested in Chinese stocks, but again, we like some of the changes we have been seeing and will continue to research Chinese companies with the goal of finding long-term investments.


The developed-market component of the benchmark (78% of the MSCI benchmark by weight) was up 4.3%, slightly ahead of the smaller emerging-market component, which was up 4.1%. Our dramatic underweight in the strong-performing U.K. market (0.5% versus 15.5% for the Index) detracted from relative performance for the second quarter, but this was more than offset by the contribution from Japan. We have shifted the Fund strongly toward Japan in recent months, which put us slightly over the benchmark’s weight of 20.5%. More importantly, our Japanese stocks beat the Japanese component of the Index in the second quarter by a whopping 3.2 percentage points, more than enough to secure developed-market outperformance.

We’ve spent a lot of time visiting Japan of late. We’ve met the management teams of a lot of Japanese companies. Japan presents some of the best fundamentals we’ve seen in a long time. After multiple years of struggling with deflation, corporations and consumers have added cash to their balance sheets. In a world of very limited top-line growth due to weak GDP expansion and an excess supply of capital and labor, Japanese companies can orchestrate growth from the bottom up by buying back shares and increasing dividends. We, like Wasatch Funds’ President Sam Stewart, see a world in which companies’ growth and stock returns will be compressed. In this world, we see it as increasingly important to own companies that can deliver returns by means other than growth at the top line. Lots of critics say Japan is too old, not innovative, and has too much debt at the government levels. We’d argue that in a knowledge-based world, Japan’s highly educated citizens, who’ve experienced deflation and are now sitting back watching the rest of the world encounter this problem, are well-equipped to navigate the current global economic environment—and they are doing so now. As far as innovation goes, Japan is the closest you will get to a circus world becoming reality—fantasy as fact. Whenever we walk through the streets of Kyoto, it feels like we’re experiencing Einstein’s space-time continuum. Where else can one see robots, a geisha, a bullet train, and Buddhists chanting all in one block? The Japanese excel at innovation. Yes, the aging population is challenging for health-care costs, but we wouldn’t put it past the Japanese to create more robots to solve this problem. Unlike our experience in China, we are finding many Japanese companies that we believe are high-quality at great valuations. We are bullish on what the next few years may hold for Japan. Yes, the Olympics—one of the greatest shows on earth—is coming to Japan in 2020 and this will help propel the economy. But, the true story of Japan encompasses the changes that are happening from the bottom up, driven by better, durable policy from Prime Minister Abe at the top, combined with corporations that are buying back shares and paying higher dividends. We believe the potential future returns from investing in Japan are compelling for the Fund.

While the Fund outperformed its developed-market standard, its performance in emerging markets was hurt by our underweight of China. The Fund held just 1.5% of its net assets in China compared with 5.4% for the Index. The China component of the Index ended the second quarter up a whopping 19.7%. (In early June, the red-hot Chinese market was actually up double that.) Our overweight position in India also hurt. The Indian component of the benchmark was down 5.2%. We were also penalized for overweight positions and the underperformance of our holdings in Malaysia and Indonesia. Fortunately, the Fund benefited from overweight positions and the strong outperformance of our stocks in Taiwan and Turkey, where our positions trounced their Index counterparts.


From a sector standpoint, the biggest source of underperformance relative to the Index came from the materials sector. Within materials, Indian stocks in the chemicals industry like Gulf Oil Lubricants India Ltd., Supreme Industries Ltd. and Berger Paints India Ltd., were not necessarily torpedoes, but with the Index sector up 2.1% in the quarter, the relative loss was more pronounced. Other chemicals stocks like SAMHWA Paints Industrial Co. Ltd. and Australia’s DuluxGroup Ltd. also detracted from sector performance.

Our heavy overweight in consumer staples (32% versus 6.2% for the Index) greatly helped performance, as that particular sector was up 7.4% globally. Food and beverage stocks like Turkish food producer TAT Gida Sanayi A.S. and Pepsi-Cola Products Philippines, Inc. were among the Fund’s top contributors.

We had a number of sectors where just one or two stocks pulled down relative performance. Despite strong performance from home-center chain DCM Holdings Co. Ltd. in Japan, its contribution to the consumer-discretionary sector was offset by Australia’s online travel website Webjet Ltd. The Fund’s performance in the financials sector was hurt by the decline in Kenyan insurer British-American Investments Co. Kenya Ltd. The health-care sector detracted primarily due to PT Kimia Farma Persero Tbk, the oldest drug producer and distributor in Indonesia. The Fund’s industrials sector was dragged down by Sarine Technologies Ltd., an Israeli company in the global diamond analysis market, and Howden Africa Holdings Ltd., an industrial-equipment manufacturer. Finally, in the information-technology sector, most of the underperformance came from Gurunavi, Inc., an online provider of restaurant information in Japan. Again, this underperformance is more dramatic when considering the Fund’s over 2% weight in the company and the fact that the Internet software and services industry component of the benchmark was up an impressive 9.6%. (Current and future holdings are subject to risk.)


Micro caps are still seeing headwinds relative to bigger companies. The chart below shows the lack of returns in the second quarter from our target universe (companies with market capitalizations of less than US$1 billion). Micro caps make up a relatively small part of the Fund’s benchmark.


Performance of MSCI AC World Ex-U.S.A. Small Cap Index



Index Weight



Market Cap >$1B




Market Cap <$1B






Harry Houdini performed one of the world’s greatest magic tricks. He could make an elephant disappear. It was one of the world’s most incredible illusions. As the second quarter unwinds and we enter a new quarter, China’s staggering paper wealth seems to be vanishing like Houdini’s elephant. It was a mirage, propped up by momentum trading. It simply wasn’t sustainable, and while we did fine in spite of this during the quarter, we wisely didn’t chase it. The show didn’t go on.

Our job as long-term investors is to analyze the fundamentals of companies and to separate the illusion—the magic of the markets—from the facts we see on the ground. We really see no changes from the past quarters. The world is a tricky place filled with slow growth, erratic policy, currency wars, high levels of government debt, and now the market turmoil caused by Greece. Greece is small in the grand scheme of the global economy. We are only about one-fifth of the benchmark’s over 40% weight in Western Europe as result of our bottom-up fundamental research. A market rebound there may hurt in the short term (as it did in China), but our goal is to position the Fund for long-term performance. We will seek opportunities when stocks pull back where possible—even potentially in Greece.

The world is also a place filled with great long-term growth companies that are innovative, and countries coming out of multiple years of deflation—like Japan—or that are receiving foreign direct investment as part of China’s new higher-quality growth strategy. We see these all as great places to invest as we have in the past. The portfolio hasn’t changed much. We continue to have faith in our companies in the long haul. Through fundamental analysis, the Fund isn’t a lot of glitter, illusion and momentum, but we believe it is filled with solid companies that have the potential to do well even when the big top moves to the next town.

Thanks for your investment!


Laura Geritz and Jared Whatcott



The MSCI All Country (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 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 indices.

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 indices. 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.

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.

‡‡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.  

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