Wasatch Ultra Growth Fund® (WAMCX)  Invest in this Fund 

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4Q18
Small-Company Stocks Had Nowhere to Hide
by John Malooly, CFA

“Selling by investors was largely indiscriminate. Every sector of the Index except the tiny utilities component posted a loss.”

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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 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 December 31, 2018, the average annual total returns of the Wasatch Ultra Growth Fund for the one-, five- and ten-year periods were 10.56%, 10.83% and 17.65%, the returns for the Russell 2000 Growth Index were -9.31%, 5.13% and 13.52%.  Total Expense Ratio: Gross 1.25%.

 

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.

Overview

Rising uncertainty in the U.S. and overseas sparked a sharp selloff in equities during the fourth quarter of the year. Small-cap growth stocks were hit particularly hard in volatile trading, with the Fund’s benchmark, the Russell 2000 Growth Index, finishing down
-21.65% for the quarter.

The Wasatch Ultra Growth Fund declined less than its benchmark, posting a decrease of -18.08% for the fourth quarter. For 2018 as a whole, the Fund gained 10.56%, which compared favorably to the benchmark’s full-year decline of -9.31%. As of December 31st, the Fund had significantly outpaced its benchmark over the preceding three-, five- and 10-year periods.

Worries about U.S. monetary policy dogged financial markets for most of the quarter. Economic-growth concerns moved to the forefront as seemingly contradictory messages from the Federal Reserve (Fed) stoked fears that the U.S. economy may be losing steam. The Commerce Department said real gross domestic product increased at an annual rate of 3.4% during the third quarter—revised down from the previous estimate of 3.5% and significantly weaker than the 4.2% pace logged during the second quarter of the year. As the immediate stimulus of the Tax Cuts and Jobs Act of 2017 continued to fade, investors fretted that a policy mistake by the Fed might bring on a recession in 2019.

Adding to investors’ apprehension was a lack of meaningful progress in resolving the trade dispute between the U.S. and China. Political uncertainty also weighed on sentiment from several corners. Civil unrest in France, together with the prospect of a “no-deal Brexit,” fanned anxiety about European growth even as a budget impasse forced a partial shutdown of the U.S. federal government. Softness in U.S. single-family housing starts and weaker-than-expected industrial production in China amplified concerns about a potential slowdown in the global economy.

Slowing global demand growth helped send U.S. crude oil prices tumbling as the energy component of the Index declined over -40% during the quarter. With every sector of the Index except the tiny utilities component posting a loss, there was virtually nowhere to hide. In the Fund, industrials and consumer discretionary were leading contributors to performance relative to the benchmark, while information-technology detracted on a relative basis due to the Fund’s overweight position in the sector. Our international holdings were down but outperformed their U.S. counterparts primarily due to the strong performance of our companies in India. Lower energy prices were good news for the Indian economy, a net importer of oil.

Details of the Quarter

Instructure, Inc. (INST) posted a gain and was one of the best contributors to the Fund’s performance for the quarter. A Software-as-a-Service (SaaS) company, Instructure provides applications for learning, assessment and performance management. The company’s stock price jumped in late October after quarterly earnings and revenues came in above Wall Street forecasts. Management cited a number of new contracts signed with school systems and corporate customers. Investors also reacted positively to the new CEO scheduled to begin leading the company on January 1, 2019.

Another strong contributor was Cocrystal Pharma, Inc. (COCP). The company develops antiviral therapies for hepatitis, influenza and noroviruses. Shares of Cocrystal Pharma surged in November on positive data for its lead drug candidate in preclinical studies for the treatment of influenza. The candidate demonstrated antiviral activity against influenza A, as well as against seasonal and pandemic influenza strains.

India’s V-Mart Retail Ltd. was also among the top contributors. V-Mart is a value fashion apparel retailer with stores in cities where there are no formal retailers. Our meeting with management in India during the quarter gave us confidence in the company’s potential to grow 15% or more annually over the long term.

A well-timed purchase of Twilio, Inc. (TWLO) also contributed to the Fund’s performance. We bought the stock on weakness during the quarter, and the Fund benefited as the stock rebounded. Twilio creates apps that businesses use for communication management. The company expects its recently introduced Flex platform to drive rapid growth over the next several years.

The greatest detractor from Fund performance for the quarter was the United Kingdom’s Metro Bank plc, a holding that was also among the third quarter’s biggest detractors. As we wrote previously, this retail bank’s competitive advantage is a disruptive, customer-first business model offering unparalleled levels of service. Metro Bank’s management team is highly experienced with the potential, in our opinion, to take significant market share from competitors over 10 years or more. Weighing against Metro Bank’s attractive growth potential were concerns about financial conditions in the U.K., including Brexit-related uncertainties and falling property prices.

Selling by investors during the quarter was largely indiscriminate. Paylocity Holding Corp. (PCTY) declined somewhat during the quarter with no significant change in the company’s business prospects. As the most-heavily weighted holding in the Fund, however, Paylocity was the second-largest detractor from performance. The company provides software for payroll and human-capital management (HCM) using the Software-as-a-Service (SaaS) business model. Paylocity’s integration marketplace allows its customers to review more than 300 integration partners and capabilities across a number of HCM functions. We maintained our position.

Another significant detractor was Selecta Biosciences, Inc. (SELB). A clinical-stage biopharmaceutical company, Selecta develops drugs for the treatment of diseases that include gout, mesothelioma and inborn metabolic disorders. Early trial results have been promising, but the company illustrates the common tug of war we see in the biotech space: great science, but a lack of financial resources to transform the science into a marketable product. Selecta failed to raise capital when its stock price was higher, and now investors fear the company may not be able to do so on favorable terms. At this point, the stock represents an extremely small position in the Fund, so we’ll continue to hold it as we expect to see new information emerge that may provide a needed boost to Selecta’s stock price in 2019. (Current and future holdings are subject to risk.)

Outlook

Of the immediate obstacles facing global financial markets, the potential for recession in 2019 has become a significant concern. Fears of recession can become self-fulfilling as households and businesses rein in spending and banks become more conservative in their lending. While the recent plunge in oil prices should help consumers and the transportation industry, other factors—such as stock-market volatility, monetary tightening, trade wars and government shutdowns—only serve to cloud the near-term outlook and heighten uncertainty about the U.S. economy.

One widely watched, forward-looking indicator is the Treasury yield curve—a curve showing yields across U.S. Treasury securities with different times to maturity. The yield curve is upward sloping under normal conditions, while an “inverted” yield curve—in which short-term interest rates exceed long-term rates—is generally considered a harbinger of recession. The yield curve has been flattening recently, with inversion occurring at the three- to five-year tenor for the first time in more than a decade. Although opinions differ as to the yield curve’s accuracy in predicting recessions, a more-severe inversion of the yield curve would be a signal that should not be ignored in our view.

Through both up and down markets, we manage the Fund from a long-term perspective. While we do seek to take advantage of short-term volatility to buy stocks at attractive valuations, we want to own companies that we believe can take market share and grow over a long investment horizon. We believe our disciplined approach to investing in small growth companies has the potential to generate attractive returns over time.

Thank you for the opportunity to manage your assets.

Sincerely,

John Malooly

 

 

**The Russell 2000 Growth Index measures the performance of those Russell 2000 Index companies with higher price-to-book ratios and higher forecasted growth values. 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 these or any indexes.

The Wasatch Ultra Growth Fund has been developed solely by Wasatch Advisors, Inc. The Wasatch Ultra Growth Fund is not in any way connected to or sponsored, endorsed, sold or promoted by the London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). FTSE Russell is a trading name of certain of the LSE Group companies.

All rights in the Russell 2000 Growth Index vest in the relevant LSE Group company, which owns the Index. Russell ® is a trademark of the relevant LSE Group company and is used by any other LSE Group company under license.

The Index is calculated by or on behalf of FTSE International Limited or its affiliate, agent or partner. The LSE Group does not accept any liability whatsoever to any person arising out of (a) the use of, reliance on or any error in the Index or (b) investment in or operation of the Wasatch Ultra Growth Fund or the suitability of the Index for the purpose to which it is being put by Wasatch Advisors, Inc.

CFA® is a trademark owned by CFA Institute.

The Wasatch Ultra Growth Fund’s primary investment objective is long-term growth of capital. Income is a secondary objective, but only when consistent with long-term growth of capital.

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.

Earnings per share or EPS is the portion of a company’s profit allocated to each outstanding share of common stock. EPS growth rates help investors identify companies that are increasing or decreasing in profitability.

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 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 Russell 2000 Growth Index measures the performance of the Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values.   Russell Investment Group is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Russell Investment Group. 

You cannot invest directly in indexes.

View the Ultra Growth 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.

Read our Holdings Release Policy and why we have one.

CFA® is a trademark owned by CFA Institute.