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

Investor Class | Institutional Class
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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, 2017, the average annual total returns of the Wasatch International Opportunities Fund for the one-, five-, and ten-year periods were 8.10%, 12.21%, and 5.66%. The returns for the MSCI AC World Ex-U.S.A. Small Cap Index were 19.19%, 9.68%, and 3.58%. 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 2.66% during the quarter ended September 30, 2017, which underperformed the 6.90% return of the MSCI ACWI (All Country World Index) ex USA Small Cap Index over the same period. Over the last 12 months, the Fund gained 8.10%, compared to 19.19% for the Index.

In Europe, economic growth continued to exceed expectations. Eurostat, the statistical office of the European Union, in September released gross domestic product (GDP) growth estimates for the 19 countries that use the euro and the 28 countries that comprise the European Union, which showed an increase of 2.3% and 2.4%, respectively, for the second quarter over the same quarter a year ago. This was the fastest growth since 2011. Additionally, the eurozone benefited from strength in manufacturing, increasingly positive business sentiment, and the highest levels of consumer confidence since 2001. These positive factors helped propel Western European equities (an area where the Fund has historically invested less than the 41% benchmark weight) to a return of 10.3% for the quarter.  Nevertheless, inflation in the eurozone continues to fall short of the European Central Bank’s 2% target, suggesting that interest rate hikes are unlikely in the near future.

Japan likewise reported higher than expected GDP growth in the second quarter, as consumer and company spending picked up. Here as well, inflation does not look set to hit the Bank of Japan’s (BOJ) 2% target any time soon. As a result, the BOJ policy Board affirmed that it “will continue with ‘quantitative and qualitative monetary easing, with yield curve control,’ aiming to achieve the price stability target of 2% as long as necessary.”

China also reported strong growth figures during the quarter, as both industrial production and retail sales beat expectations. Despite a downgrade of China’s credit rating by Standard & Poor’s less than a month before the start of the Communist Party Congress, held once every five years, China’s equity markets were also among the top performers for the quarter.

Despite the increase in political risks, including rising tensions between the U.S. and North Korea, macroeconomic data continued to suggest that the global economic recovery remains intact. 

Details of the Quarter

Headwinds faced by micro-cap stocks, which have been somewhat persistent over time, were even more pronounced during the third quarter. Stocks in the MSCI ACWI ex USA Small Cap Index with market capitalizations over $1 billion (roughly three-fourths of the benchmark) returned 8.6% during the quarter, nearly seven percentage points higher than the returns of stocks with market capitalizations of less than $1 billion. In some markets, the headwinds were even more pronounced. Chinese micro-caps underperformed by 18 percentage points, Taiwanese micro-caps lagged by 13 percentage points, Korean micro-caps fell short by 10 percentage points, and Indian micro-caps trailed by over nine percentage points. As a result, the Fund’s focus on micro-cap stocks was a significant disadvantage during the quarter, one we were simply not able to overcome with individual stock picking.

Countries

Developed markets continued to outperform emerging markets over the course of the quarter, as they have done over the last 12 months. The Fund’s developed market investments made up 57% of the portfolio at quarter-end and our developed market holdings were up more than those in the Index. Specifically, a handful of Japanese companies that we consider to be high quality contributed significantly to performance. In fact, two of the Fund’s top contributors were from Japan. Open Door, Inc. runs a travel comparison website where it has been taking share in the fast-growing online travel market in Japan. Yume No Machi Souzou Iinkai Co. Ltd. operates an online platform offering restaurant delivery services through its market-leading “Demae-can” portal. We like to think of Yume No Machi as the Grubhub/Just Eat of Japan.††

Additionally, we had a number of top-contributing stocks from Western Europe and the United Kingdom (U.K.). Hypoport AG, for example, is a potentially disruptive internet-based platform for borrowing and lending in Germany. Hypoport’s stock was up over 35% during the quarter. Smart Metering Systems plc, the only independent provider of outsourced gas infrastructure connection management and smart metering solutions to U.K. utilities, saw its stock price rise 36%. Its recurring revenues and potential future growth are reasons the stock has more than doubled since we added it to the Fund two years ago.

On the flip side, the Fund’s significant overweight in emerging markets (40% at quarter-end versus an average weight of 22% for the Index) continued to be a headwind. As would be expected in a strong market, the defensive nature of many of our emerging market stocks further added to that underperformance.

On a country basis, the Fund’s biggest detractor relative to the benchmark was India, a market in which we were more than double the Index’s 3% weight, and a market in which our stocks significantly underperformed those in the benchmark. One of the reasons India has been struggling lately is the disruption that has emerged from the government’s implementation of a nationwide goods-and-services tax (GST). While we believe restructuring the tax system will be positive for the long-term trajectory of India’s economy, we expect some disruption over the next few quarters as businesses, especially small and medium-size enterprises, adjust. One of the Modi government’s main areas of focus is the formalization of the economy. We believe our holdings have the potential to benefit during this transition as they seek to gain market share from companies operating in the informal economy, which given the government’s reforms, is likely to shrink over time. In general, we hold a positive view of a number of reforms that are being implemented in India, and though they will take some time to fully work their way through the economy, we expect the Indian companies we own to be long-term beneficiaries.

One of the Fund’s biggest detractors was Can Fin Homes Ltd., a company that finances middle- and low-income housing, which has been enjoying major support from the government. Over the past year, the stock returned over 60%, though as valuations for it and the rest of the Indian housing finance market escalated, implementation of the GST and housing supply constraints caused many investors to trim their holdings. Again, from a longer-term perspective, we believe our thesis for owning Can Fin Homes remains intact, and given that there is only 8% mortgage penetration in India, we believe the growth runway for Can Fin and other housing finance companies remains phenomenal.

During the quarter, the Fund had an average weight of just 2.2% in Pakistan compared to an even smaller 0.2% weight in the Index. Pakistan was the Fund’s next biggest detractor from relative performance. All three of the stocks we owned were down significantly. Even after being down -17% in the third quarter, Hascol Petroleum Ltd. was still up over 50% since we added it to the Fund over a year ago. This nimble downstream company is expanding its station network, port facilities, and lubricants business, and continues to take share in the young market. Pak Elektron Ltd. sells electrical equipment and domestic appliances. New management is working to turn around the company’s financials and position the company to take advantage of growing consumer and infrastructure spending. Finally, PAK Suzuki Motors Co. Ltd. is the local manufacturer of Suzuki automobiles, motorcycles, and commercial vehicles in Pakistan, with over 50% market share. We believe the company is well poised to benefit from Pakistan’s growth in GDP and increased penetration of vehicles in the country. A hat trick of difficulties during the quarter meant Pakistan’s market was hit hard. These included selling by index-oriented frontier funds as Pakistan graduated from a frontier market to an emerging market, a political crisis that saw Prime Minister Nawaz Sharif removed from office, and the largest private bank in Pakistan, Habib Bank Ltd., which is not held in the Fund, being penalized with a record fine of up to $630 million by the New York State Department of Financial Services for violations of anti-money laundering regulations. Together, these events contributed to the -28% decline in the Fund’s Pakistan position, a significant reversal from the performance this market has historically contributed to the Fund. (Current and future holdings are subject to risk.)

Sectors

From a sector perspective, health care and consumer staples were the weakest- performing sectors in the Index with gains of just over 3% each. Unfortunately, the Fund was overweight in both sectors. The Fund benefited relative to the Index from overweight positions in the consumer-staples and information-technology sectors. Conversely, the industrials and information-technology (IT) sectors contributed significantly to the Index’s return in the quarter, as these sectors have benefited from a cyclical upturn in many markets. The Fund’s underweight position in the industrials sector detracted and our holdings underperformed their benchmark counterparts, but the Fund’s significant overweight in the IT sector aided relative performance.

The performance of the Fund’s consumer discretionary sector lagged that of the benchmark’s sector, in part due to PAK Suzuki Motors and Hascol Petroleum mentioned above. The Fund’s lack of exposure to emerging market real estate and developed market energy, which were two of the top-performing sectors within these categories of the benchmark this quarter, also detracted from performance. We are generally comfortable being underweight in these sectors, though, as companies’ business models typically lack the quality we require for investment.

Outlook

Global equity markets—from Europe to China to Japan to South America—have continued to benefit from increasing strength of their underlying economies. The Brazil component of the index, for example, was up over 30% during the quarter, with Germany up 17%, and China up nearly 13%. Of course, this brings up the question of the “risk trade” reversing—whether due to eventual interest rate hikes in developed market, an economic slowdown in China, a geopolitical event, or some other unforeseen development—that could potentially set up global markets for a correction. And while trying to forecast which markets will outperform and which will underperform is not something we do, we are confident that our years of experience and our disciplined investment process will continue to lead us to what we believe are the highest quality companies wherever they might be in the world.

On a recent trip “Down Under” we came away excited about some of the new micro-cap companies we visited in the region. It was a busy week—traveling to five cities in five days—but it was well worth the effort when we found ourselves sitting down with the highly capable management team of a company that the market hasn’t fully discovered and hearing them explain the company’s competitive advantages and their detailed strategy for achieving their business goals that they believe could add significant value to shareholders. In addition to Australia and New Zealand, our travels also took us to Europe and Asia during the quarter. We also had dozens of phone calls and meetings with executives at companies that we believe have the potential to propel the Fund forward. We remain confident in our process and committed to uncovering what we see as the World’s Best Growth Companies of the future.

Our team is grateful 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 September 30, 2017, the Wasatch International Opportunities Fund was not invested in Grubhub Inc. or Just Eat plc.

A credit rating is an assessment of the credit worthiness of individuals, corporations and countries. It is based upon the history of borrowing and repayment, as well as the availability of assets and extent of liabilities. Ratings are issued by S&P or Moody’s and typically range from AAA (highest) to D (lowest). For information on the rating agency’s methodology visit: http://www.standardandpoors.com/home/en/us and http://www.moodys.com.

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.

World’s Best Growth Companies are defined by Wasatch as companies that we believe possess an identifiable, sustainable competitive advantage, are well managed, underfollowed, undervalued and are producing above average earnings growth relative to their industry and country of origin.

The yield curve is a line on a graph that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity dates. The most frequently reported yield curve compares three-month, two-year, five-year and 30-year U.S. Treasury securities. This yield curve is used as a benchmark for other interest rates, such as mortgage rates or bank lending rates. The curve is also used to predict changes in economic output and growth.

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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