Wasatch Small Cap Value Fund® (WMCVX)  Invest in this Fund 

Investor Class | Institutional Class
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Q4 2017
A Strong Fourth Quarter Capped a Year of Outperformance
by Jim Larkins

“We have found through rigorous study that our top-performing investments usually are not in the “tail” of the Fund, so we increased our emphasis on our highest-conviction positions.”

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For the period ended December 31, 2017, the average annual total returns of the Wasatch Small Cap Value Fund for the one-, five- and ten-year periods were 19.55%, 16.22% and 9.13%, the returns for the Russell 2000 Value Index were 7.84%, 13.01%, and 8.17%, and the returns for the Russell 2000 Index were 14.65%, 14.12%, and 8.71%.  Expense ratio: Gross 1.41%.


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 fourth quarter brought a hearty stock-market advance that was highlighted by a series of record highs in the key indexes. Investor sentiment was boosted by the environment of improving economic growth, rising corporate earnings, and the passage of long-anticipated, corporate-friendly tax reform. The Fund’s primary benchmark, the Russell 2000 Value Index, posted a gain of 2.05% that brought its full-year return to 7.84%.

The Wasatch Small Cap Value Fund—Investor Class performed well in the rally and significantly outpaced the Index for the quarter and the year, with returns of 6.76% and 19.55%, respectively. We believe these results are a reflection of our strategy. While analysis of valuations is a core part of our investment process, we also seek to own undervalued companies with favorable earnings prospects and/or exposure to powerful secular growth themes. One result of this approach is that the Fund typically features stronger growth characteristics than the Index—a benefit during times, such as 2017, when growth stocks outperform. Our balanced strategy has also worked well over the long term, as evidenced by the Fund’s outperformance relative to its benchmarks in the
three-, five- and 10-year periods.

Details of the Quarter

We generated outperformance across multiple sectors in the fourth quarter, but the consumer-discretionary sector was a notable area of strength. Within the sector, retail stocks performed poorly in 2017 due to concerns about intensifying competition from Amazon.com,†† so we saw the specialty retail industry as an obvious place to look for potential values. We spent a great deal of time analyzing the space to identify companies whose stocks sold off in sympathy with the larger category, but that we believed retained defensible market positions, a moderate store base and a strong internet presence. Our search identified women’s apparel retailer J.Jill, Inc. (JILL) as a possible target. So we were prepared to establish a position after the company’s share price dropped sharply in October due to an earnings miss. J.Jill’s stock subsequently staged a healthy recovery from its autumn lows amid a rally in the overall consumer space, and the Fund benefited in kind.

Sleep Number Corp. (SNBR), a Fallen Angel (defined by Wasatch as a growth stock that has temporarily slid into value territory) was another top 10 contributor. Our experience with the company goes back over a decade, and we increased our position in the stock during the summer of 2017 to take advantage of a combination of factors that we felt had yet to be fully reflected in the company’s earnings. New bed models, updated information-management systems and a shift to off-mall locations started to benefit the company’s bottom line in the fourth quarter, and we believe these developments have the potential to make Sleep Number a rewarding investment in 2018.

Our investments in stocks that typically perform well late in an economic cycle were a further plus. We have found that cyclical stocks—which ordinarily trade at below-average valuations—often experience a meaningful increase in valuations when an economic expansion proves more durable than anticipated (as was the case in the second half of 2017). A prime example of this dynamic at work was LGI Homes, Inc. (LGIH), which finished the quarter as the Fund’s top contributor after its stock price surged on growing optimism about prospects for the U.S. housing market. We chose to reduce the size of our position in response to the stock’s increase in value.

The benefits of our bottom-up approach paid off with a number of our Fallen Angels, most prominently ZAGG, Inc. (ZAGG), the dominant maker of screen protectors for mobile devices. The company stumbled in early 2016 after experiencing difficulty integrating an acquisition. Mishandled acquisitions are a common trait of Fallen Angels, as investors often lose patience when the benefits of integration are not immediately realized. We used this as an opportunity to purchase shares of a market leader at a discounted valuation. The stock remained flat for some time, but we held on to the position based on the stability of ZAGG’s underlying cash flows. Our patience paid off in the second half of 2017, when the combination of improved performance from the acquisition, the introduction of new products and increased collaboration with Apple†† on the next generation of iPhone products caused the stock to soar. Consistent with our disciplined approach, we took advantage of the positive price action to trim our position in ZAGG as the stock reached what we considered full valuation.

In a period of robust performance for the Fund, few stocks stood out as detractors. The most significant was Fabrinet (FN), a long-term winner for the Fund that weakened due to softer end-market demand for optical-related components. The company faces some near-term risks, but we believe its longer-term outlook is well-supported by its exposure to fast-growing areas such as auto-safety technology and high-speed data transmission.

Euronet Worldwide, Inc. (EEFT) was the Fund’s second-largest detractor. Euronet is a global payment and money-transfer firm based in the U.S. One of the many locales in which Euronet processes ATM transactions is the United Kingdom. In early November, the operator of the U.K.’s ATM network announced that it’s considering cutting the fees that network members pay each other when their customers take out cash. The concern is that many currently free-to-use cash machines could face closure. Investors also reacted to the decreasing likelihood that Euronet would acquire another brand. However, we see these developments as having relatively minor significance. And we maintain our positive view on the company’s prospects.

Home health-care company LHC Group, Inc. (LHCG) experienced some weakness after management announced a merger. Although we think this move is positive from a long-term standpoint, it does introduce execution risk for the next year. We therefore reduced the position slightly, but retained a sizable investment based on the company’s potential to benefit from the trend toward lower-cost health-care solutions. (Current and future holdings are subject to risk.)

Outlook and Positioning

The positive economic backdrop and the passage of tax-reform legislation remained key pillars of support for the market as 2017 drew to a close. At the same time, it has become more challenging to find stocks with attractive risk/return profiles given the strength in the broader indexes in the past year.

In response to these circumstances, we applied a multi-faceted strategy designed to help insulate the Fund from downside risk. First, we sought to optimize the Fund by eliminating positions in stocks where we had smaller weightings and a lower level of conviction. We have found through rigorous study that our top-performing investments usually are not in the “tail” of the Fund, so we increased our emphasis on our highest-conviction positions. This prompted us to reduce or eliminate a number of holdings that we concluded were fully valued or that carried the potential for heightened risk. Holdings we eliminated included Exact Sciences Corp. (EXAS), Artisan Partners Asset Management, Inc. (APAM), PRA Group, Inc. (PRAA), Pinnacle Financial Partners, Inc. (PNFP) and Customers Bancorp, Inc. (CUBI).

Second, while we maintained an emphasis on managing downside risk, we also kept an eye out for value opportunities in specific areas of the market. In addition to increasing the Fund’s investments in retailers, we added Oil States International, Inc. (OIS). The longstanding reputation of Oil States’ management team and the strength of the company’s balance sheet gave us confidence to add the stock to the Fund, and we believe it complements our existing holdings in Gran Tierra Energy, Inc. (GTE) and Earthstone Energy, Inc. (ESTE). We see this type of steady rotation into companies we believe are undervalued as being essential at a time in which market valuations have become somewhat extended in our view.

Not least, we maintained a focus on companies we consider higher quality and sought to avoid those with attributes that indicated elevated downside risk. For instance, we continued to avoid companies facing rising competition, as well as those with deteriorating balance sheets. We have also been quick to eliminate positions when our original case for buying a stock no longer holds, rather than maintaining a losing investment on the notion that it’s “too cheap to sell.” Finally, we have been very cautious with respect to stocks that are nearing what we believe are extended valuations.

In combination with our deep due diligence, this patient, thoughtful approach contributed to positive results both in 2017 and over the long term, and we believe it can help the Fund navigate a potentially less favorable environment in the year ahead.

Thank you for the opportunity to manage your assets.


Jim Larkins



**The Russell 2000 Value Index measures the performance of Russell 2000 Index companies with lower price-to-book ratios and lower forecasted growth values.

The Russell 2000 Index is an unmanaged total return index of the smallest 2,000 companies in the Russell 3000 Index, as ranked by total market capitalization. The Russell 3000 Index is an unmanaged total return index of the largest 3,000 U.S. companies based on total market capitalization. The Russell 2000 Index is widely used in the industry to measure the performance of small company stocks.

You cannot invest directly in these or any indexes.

Frank Russell Company is the source and owner of the Russell Index data contained or reflected in this material and all trademarks and copyrights related thereto. This is a presentation of Wasatch Advisors, Inc. The presentation may contain confidential information and unauthorized use, disclosure, copying, dissemination or redistribution is strictly prohibited. Frank Russell Company is not responsible for the formatting or configuration of this material or for any inaccuracy in Wasatch Advisors, Inc.’s presentation thereof.

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

††As of December 31, 2017, the Wasatch Small Cap Value Fund was not invested in Amazon.com, Inc. or Apple, Inc.

Valuation is the process of determining the current worth of an asset or company.


The Russell 2000 Value Index measures the performance of Russell 2000 Index companies with lower price-to-book ratios and lower forecasted growth values.   The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index.   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 Small Cap Value Fund’s most current Top 10 Holdings

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