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Wasatch Emerging Markets Select Portfolio   

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Q1 2019
As India Lagged, Other Countries Drove Fund Performance
by Roger Edgley, CFA, Ajay Krishnan, CFA and Scott Thomas, CFA

“With India lagging the Index as a whole, our overweight allocation to India was a headwind for the Fund. Our underexposure to China also hurt relative performance. We were pleased to see the Fund overcome these headwinds and post a quarterly return well ahead of its benchmark.”

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Emerging-market equities got off to a strong start in 2019, helped by a dovish shift in U.S. monetary policy and the prospect of additional economic stimulus in China. The benchmark MSCI Emerging Markets Index rose 9.92% during first quarter of the year. Wasatch Emerging Markets Select portfolios produced gains that surpassed their benchmark.

After signaling a “patient” approach to raising interest rates in January, the U.S. Federal Reserve (Fed) pleased investors again in March by projecting no further rate hikes this year. The central bank also downgraded its outlook for U.S. economic growth and said it would stop shrinking its balance sheet in September. Taken together, the Fed’s moves undercut the U.S. dollar, making riskier investments in emerging markets more attractive to investors.

Strong gains in China and Brazil drove portfolio performance and were the main reasons the portfolios outpaced their benchmark. Softness in industrial production and retail sales pushed China’s unemployment rate from 4.9% in December to 5.3% in February—the highest level in two years. The Chinese government sought to reassure investors, vowing to continue supporting the nation’s economy by cutting taxes and fees. As China’s stock market advanced against the backdrop of a deepening economic slowdown, the portfolios’ Chinese holdings outperformed the Chinese positions in the benchmark.

In Brazil, gross domestic product (GDP) growth slowed to just 0.1% during the fourth quarter of 2018 according to a report released by the national statistics agency in February. New president Jair Bolsonaro now faces the difficult tasks of reforming Brazil’s ailing pension system and reviving an economy beset with double-digit unemployment and stagnant wage growth. While the Brazilian component of the benchmark lagged the Index as a whole during the first quarter, the portfolios’ Brazilian stocks posted significantly larger gains. Despite Brazil’s challenges, we believe the companies we own there represent enduring, high-quality businesses with attractive prospects for long-term growth.

Our Indian holdings outperformed their benchmark counterparts, though both fell short of the Index’s overall return. The portfolios’ overweight positions in India were headwinds to performance relative to the benchmark, as apprehension ahead of upcoming elections kept Indian equities in check during January and February. A 25% increase in the U.S.-dollar price of Brent crude during the quarter also impacted sentiment toward India, which imports about 80% of the oil it uses.

Details of the Quarter

Chinese stocks accounted for several of the portfolios’ strongest contributors to performance. Among these were the top contributor International Ltd. ADR followed by Vitasoy International Holdings Ltd. and Alibaba Group Holding Ltd. ADR, the third- and fourth-largest contributors, respectively. The price of Ctrip’s American depositary receipts soared in early March after the online travel agent reported better-than-expected earnings and revenues in its most-recent quarter. Management cited the company’s customer-centric initiatives and platform improvements, as well as Ctrip’s expansion into lower-tier cities through localized product and service offerings. Longer term, the company stands to benefit from rising urbanization rates and the transformation of China’s economy from manufacturing and investment to service and consumption.

Vitasoy offers soy milk, tofu, rice milk, tea, juices and related food-and-beverage products in over 40 countries. Concerns about trade and the economy weighed on Chinese stocks during March, boosting the appeal of Vitasoy’s stable business. In the company’s most-recent reporting period, management cited improved manufacturing and favorable trends in commodity prices, particularly sugar and milk powder.

Alibaba is a Chinese multinational conglomerate specializing in e-commerce, retail, internet and technology. Depositary shares of Alibaba rose steadily in January and February amid strong top-line growth across its business segments. Diluted earnings per share in the company’s most-recent quarter exceeded expectations, rising 37% year-over-year on 41% revenue growth. Core-commerce revenue grew 40%, while cloud computing surged 84%. Alibaba saw digital media and entertainment revenue increase by 20% and innovation-initiatives revenue rise 73% compared to the same quarter last year.

MercadoLibre, Inc. (MELI) was the second-largest contributor. The company operates e-commerce platforms in Brazil and other Latin American countries. MercadoLibre’s payment solution, MercadoPago, is driving strong growth at the company as an increasing number of e-commerce sites and brick-and-mortar retailers adopt MercadoPago as a preferred payment method. Total revenues in MercadoLibre’s most-recent quarter increased 19.5% versus the year-ago period, topping expectations.

The greatest detractor from portfolio performance for the quarter was Discovery Ltd. provides insurance products and services in South Africa and other countries. Higher-than-expected mortality experience impacted Discovery’s life-insurance business in the company’s most-recent quarter. Increased spending in Discovery’s new businesses, which include a bank in South Africa and a health-insurance venture in China, also hampered profitability. Given the expected growth in these new areas, however, we think the investments make sense. Meanwhile, we believe the uptick in mortality is likely to be temporary, and our long-term thesis for the company remains intact.

Second-largest detractor Godrej Consumer Products Ltd. operates in India and internationally. Godrej is one of India’s leading manufacturers of household insecticides. As Indian consumers seek new forms of protection from mosquito-borne diseases, illegally manufactured mosquito-repellent incense sticks have captured a significant share of the household-insecticide market. Now that Godrej has launched its own mosquito-repellent incense stick under the flagship Goodknight brand, we expect the competitive situation to improve as informal players exit the market. The recent slowdown in the company’s African and Latin American consumer-products businesses is less clear cut, however, and our research is ongoing.

Medytox, Inc. is a Korean manufacturer of neurotoxins for cosmetic applications and the treatment of muscular disorders. In what was a quarter of generally positive performance, the -1.03% decline in the stock price of Medytox was enough to make this holding the third-largest detractor from portfolio performance. The Chinese government’s recent clampdown on black-market shipments of neurotoxins from Korea to China modestly impacted operating results at Medytox in its most-recent quarter. However, the company expects to receive formal approval from China soon. We think Medytox stands to benefit in the long run as China’s clampdown on illegal imports reduces competition.


As the most-heavily weighted country in the portfolios, India has the potential to exert an outsized influence on performance. With India lagging the Index as a whole during the first quarter, our overweight allocation to India was a headwind for the portfolios. Our underexposure to China also hurt relative performance as Chinese positions beat the Index overall. We were pleased to see the portfolios overcome these headwinds and post quarterly returns well ahead of their benchmark.

Part of the reason for the portfolios’ outperformance is the type of companies we own. Of particular interest to us are stable businesses tied to secular growth in domestic demand from an expanding middle class. We’re less interested in exporters and commodity producers, which are often subject to the whims of the global economy. During the first quarter, heightened concerns about the pace of global growth boosted the appeal of our high-quality, long-duration businesses. We believe equity markets driven by company fundamentals favor our research-driven, bottom-up investment approach.

Given recent structural reforms in India, we’re comfortable carrying an above-benchmark weighting in Indian stocks. Although the uncertainty surrounding India’s upcoming general election kept a lid on stock prices for most of the quarter, March was a month of strong gains for Indian equities. We attribute at least part of the optimism to Prime Minister Modi’s handling of recent skirmishes with Pakistan along India’s northern border. Mr. Modi’s decision to target terrorist camps in Pakistan appears to bode well for his ruling party’s electoral chances and pro-business agenda.

In China, we continue to devote significant research attention to the A-share market, which consists of the stocks of approximately 1,400 companies incorporated in mainland China. Quoted in Chinese renminbi, A-shares are traded on China’s Shanghai or Shenzhen stock exchanges. Identifying long-duration growth opportunities of the type we favor has proven particularly difficult in China. The task is complicated by the need to invest in Chinese companies whose businesses align with the goals of the Chinese government.

Thank you for the opportunity to manage your assets.



*The MSCI Emerging Markets Index is a free float-adjusted market capitalization index designed to measure the equity market performance of emerging markets. You cannot invest in this or any index.

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. (

China A-shares, along with B-shares, are sold on mainland China’s two stock exchanges, which are in Shanghai and Shenzhen. The key difference between A-shares and B-shares is that A-shares are denominated in mainland China’s currency, the renminbi, and B-shares are denominated in foreign currency (U.S. dollars in Shanghai and Hong Kong dollars in Shenzhen).

The “cloud” is the internet. Cloud-computing is a model for delivering information-technology services in which resources are retrieved from the internet through web-based tools and applications, rather than from a direct connection to a server.

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.

The Shanghai Stock Exchange is the largest stock exchange in mainland China. It is a non-profit organization run by the China Securities Regulatory Commission (CSRC).

The Shenzhen Stock Exchange, based in Shenzhen, Guangdong, is one of China’s three stock exchanges. The other two are the Shanghai Stock Exchange and the Hong Kong Stock Exchange.

This commentary is intended to provide you with information about factors affecting the performance of Wasatch Emerging Markets Select portfolios during the quarter. References to individual companies should not be construed as recommendations to buy or sell shares in those companies. Wasatch analysts closely monitor the companies held in Emerging Markets Select portfolios. If a company’s underlying fundamentals or valuation measures change, Wasatch will reevaluate its position and may sell part or all of its holdings.

Past performance is not indicative of future results.