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Wasatch Global Small Cap Portfolio   

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Q4 2018
Global Equity Markets Declined Broadly

“Reacting to rising short-term interest rates, a looming U.S.-China trade war and signs of a slowdown in parts of the global economy, investors pushed equity prices sharply lower in the final quarter of 2018.”

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Reacting to rising short-term interest rates, a looming U.S.-China trade war and signs of a slowdown in parts of the global economy, investors pushed equity prices sharply lower in the final quarter of 2018. No sectors and few countries were spared. Wasatch Global Small Cap portfolios declined during the fourth quarter, performing in line with their benchmark, the MSCI All Country (AC) World Small Cap Index,* which dropped -16.76%.

Among sectors, industrials, health care and information technology subtracted the most from portfolio returns. But our holdings in information technology and health care, along with those in financials, declined less than their benchmark counterparts. One of the weakest-performing sectors in the portfolios and the benchmark was industrials. The sector was particularly hard hit by a slowdown in economically cyclical companies that had investors seeking more attractive alternatives.

U.S. equities, representing nearly half of portfolio assets, accounted for more than half of the portfolios’ declines during the quarter. On a country basis, the two other notable detractors were Japan and the United Kingdom. Eking out small gains were India and China, while Taiwan posted a loss that was smaller than the losses of other countries in which the portfolios were invested.

In the U.S., the quarter opened with investors increasingly worried that rising short-term interest rates would put a damper on the equity markets. These fears were confirmed when on December 19th, the Fed raised the federal-funds rate for the fourth time in 2018 to a range of 2.25% to 2.5%. Fed officials signaled that this could be the last rate hike for a while as their projections for economic growth and inflation in 2019 removed the urgency of repeated rate hikes. As for the trade dispute with China, little if any apparent progress was made, further unsettling the markets.

Lack of progress was also largely to blame for the market downturn in the U.K., where Brexit negotiations seem at an impasse. Our U.K. holdings, however, are mainly exporters and therefore, in the long run, are likely to be less affected by Brexit than many domestic-facing companies.

Although the Japanese equity market also suffered a sharp decline during the quarter, we believe that Japan’s investment environment remains extremely attractive. From an economic perspective, the currency has been relatively stable, domestic indicators such as wage inflation have continued to improve, corporate governance has been getting better, and domestic demand has continued to increase. For our Japanese investments, which are primarily domestic facing, earnings have been strong. That said, we did see volatile markets during the quarter with stock prices going down. We think this was little more than short-term weakness, partially the result of nervousness among investors around the world. We continue to believe that the Japanese companies we own have strong fundamentals with outstanding long-term growth potential.

Details of the Quarter

A number of the portfolios’ top contributors during the quarter are based in India, one of the few countries to experience market gains in the period. A large importer of oil, India and its currency benefited from falling oil prices. Bajaj Finance Ltd. is a non-bank financial company offering a broad spectrum of lending services that include vehicle loans, mortgage loans, consumer loans and commercial loans. Shares of Bajaj Finance, which were indiscriminately punished in September, rebounded in October on an easing of the interest-rate pressures that had threatened to further increase the company’s funding costs. Longer term, we think the backing of Bajaj Group, the parent company, will provide Bajaj Finance with an advantage over weaker competitors that may find it more difficult to obtain funding.

ICICI Lombard General Insurance Co. Ltd. is another Indian financial company that outperformed as falling oil prices eased inflationary pressures, allowing India’s central bank to hold its policy interest rate unchanged.

Vitasoy International Holdings Ltd., a Chinese company, offers soy milk, tofu, rice milk, tea, juices and related food-and-beverage products in over 40 countries. Another contributor in the fourth quarter, earnings per share rose 30% year-over-year in the company’s most-recent reporting period on 22% revenue growth. Management cited improved manufacturing efficiency and favorable trends in commodity prices, particularly sugar and milk powder.

Among the detractors from portfolio performance during the quarter, U.K.-based Metro Bank plc had the largest impact. We believe Metro Bank’s customer-focused business model, similar to that of Commerce Bancorp in the U.S., represents a genuine long-term challenge to the U.K.’s banking establishment. While larger banks are adjusting to Brexit by de-emphasizing their U.K. presence in favor of overseas operations, Metro Bank is building up its U.K. operations and service. During the quarter, the stock was beaten up amid Brexit-related economic uncertainty. Over the long term, however, we think the bank has strong growth potential as it takes market share from competitors.

U.S.-based HealthEquity, Inc. (HQY) was the second-largest detractor from performance in the fourth quarter. The company provides an online platform to manage a variety of health-care accounts, including Health Savings Accounts (HSAs), Health Reimbursement Arrangements and Flexible Spending Accounts. The company’s stock price rose over 25% in the past 12 months, and significantly outperformed the health-care sector overall. Despite succumbing to the market’s selloff in December, we continue to view HealthEquity as well-positioned in the HSA market.

Another one of our leading contributors for the year, Ollie’s Bargain Outlet Holdings, Inc. (OLLI), turned into a significant detractor during the fourth quarter as volatility took hold among retail stocks. Ollie’s is an extreme-value retailer that acquires excess inventory of brand-name products in a wide variety of categories, then offers those products to customers who enjoy the bargain-priced, “treasure hunt” shopping experience. Despite its sharp decline in November and December, we think the company has a strong growth strategy with the potential to operate hundreds more stores a few years from now.

The fourth-quarter downturn in Japan did not spare Nihon M&A Center, Inc., which is the leading provider of services for mergers and acquisitions to small businesses in Japan. The company has seen a slowdown in deal flow in recent quarters, which led to a selloff in the share price. The company continues to hire and invest, which should drive future earnings growth. We believe that demographic trends and a wave of consolidation in Japan are strong secular drivers for this business and the slowdown in deal flow is only temporary.


In the U.S., we’ll be keeping a close eye on the Federal Reserve. While the companies we own continue to possess strong fundamentals, and the economy continues to grow, the fourth-quarter market downturn clearly demonstrated that higher short-term interest rates have begun to unnerve many investors.

Turning attention to the U.K. and Europe, a March 29th deadline to resolve Brexit is looming and uncertainty is high, though we remain optimistic regarding the prospects of our U.K. holdings. Our holdings tend to be more globally focused and therefore less dependent on the U.K. domestic economy. We are monitoring the fundamentals of the high-quality opportunity set in the U.K. While the state of political affairs in the U.K. remains uncertain, we believe that markets tend to overshoot both on the positive and negative side and we are starting to see compelling opportunities. Our first overseas research trip in 2019 is to the U.K.

Thank you for the opportunity to manage your assets.



*The MSCI AC World 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. This index is a free float-adjusted market capitalization index designed to measure the performance of small capitalization securities. You cannot invest directly 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. (

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 growth is a measure of growth in a company’s net income over a specific period, often one year.

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.

The federal-funds rate is the interest rate at which private depository institutions (mostly banks) lend balances (federal funds) at the Federal Reserve to other depository institutions, usually overnight. It is the interest rate banks charge each other for loans.

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


This commentary is intended to provide you with information about factors affecting the performance of Wasatch Global Small Cap 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 Global Small Cap 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.

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