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Wasatch International Micro Cap Portfolio   

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Q4 2018
Volatile Global Markets Provide Opportunities for Hands-on Investors

“We have been seeking to take advantage of the many great buying opportunities that have resulted from indiscriminate selling across global markets.”

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Wasatch International Micro Cap portfolios declined in the fourth quarter and underperformed the benchmark MSCI ACWI (All Country World Index) ex USA Small Cap Index,* which fell -14.43%. For the year, the portfolios outperformed, declining less than the benchmark.

There was no shortage of news throughout the year to dampen the enthusiasm in the markets. Examples included tension among some global trading partners, the financial and political issues plaguing Italy, political uncertainty in countries like Sweden and Australia, rising interest rates as central bankers in parts of the world began normalizing monetary policy, and weakening economic indicators in some countries, particularly China. Global growth remains positive but has become less broad based. We expect further volatility in the markets and tempered company outlooks as we enter 2019.

While macro-related events and economic cycles can impact companies in the short term, our view is that the underlying value of the portfolio’s holdings will persist over the longer term because they are high-quality companies as evidenced by their enduring competitive advantages, outstanding business models and management teams, and strong balance sheets and cash flows. Such companies have the ability to adapt quickly, continue to invest in their businesses, and take advantage of uncertainty and disruption to grow from cycle to cycle. In uncertain times such as we experienced in 2018, we believe quality is key and we are confident that our high-quality, long-duration growth companies have the potential to be able to navigate turbulent markets and emerge stronger.


The fourth quarter, particularly the month of October, saw an abrupt reversal in developed equity market trends. During the quarter, the portfolio underperformed its benchmark with Japan and the United Kingdom weighing heavily on performance. For the full year, although our Japanese holdings were down and subtracted from the portfolio’s return, they outperformed the benchmark’s position in Japan. In the U.K., our holdings were down for the year and detracted from performance relative to the benchmark. Overall, our emerging-market names held up better than their developed-market counterparts in the fourth quarter, given their better relative value coming into the quarter after seeing weaker performance earlier in the year.

China was the portfolio’s top contributor for the 12 months ended December 31, 2018 with Yihai International Holdings Ltd. and Vitasoy International Holdings Ltd. driving performance. Yihai benefited from the initial public offering (IPO) of its former parent and largest customer, Haidilao International Holding Ltd.,** one of China’s most-popular hotpot restaurant chains. Yihai manufactures and sells hotpot soup flavorings, hotpot dipping sauces and Chinese-style compound condiments under the Haidilao brand name. Yihai’s stock, despite a December decline, gained more than 145% in 2018. Vitasoy produces and sells soy milk, teas, and tofu products in China, Hong Kong, Southeast Asia and Australia. The company’s “Go Deep, Go Wide” expansion strategy in China continued to deliver strong growth in the country. Both Yihai and Vitasoy also delivered strong quarterly results and contributed to fourth-quarter portfolio performance.

Denmark and Taiwan were also top contributors for the year. Our only holding in Denmark is Royal Unibrew A/S, a regional beverage provider primarily in Denmark, Finland, Italy, Germany and the Baltic countries. Throughout the year, Royal Unibrew announced strong results and was able to acquire new brands to expand the company’s geographic reach and penetration. Taiwan’s TCI Co. Ltd. was the portfolio’s top contributor for all of 2018. TCI is a contract manufacturer of health food supplements. Strong trends in new distribution channels like WeChat drove abnormally high growth. While the company has an industry-leading position, a high valuation led us to trim our position as the stock price rose.

For the fourth quarter, India was the top contributor to portfolio performance. We rounded up on many of our Indian holdings when they were weak in the first half of 2018. Many of these names rebounded in the fourth quarter. Gulf Oil Lubricants India Ltd. is the second most dominant company in the auto-lubricants market in India. During the quarter, it seemed that input costs may have peaked and that margins may rise going forward. V-Mart Retail Ltd. is a value fashion apparel retailer 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. Berger Paints India Ltd., the second-largest decorative-paint company in India, was also a strong contributor. In the quarter, the company announced it would be hiking prices to fully protect margins, which was viewed positively by investors.

In the U.K., Brexit weighed heavily on consumer sentiment and created uncertainty among businesses. Clipper Logistics plc and accesso Technology Group plc were detractors for the quarter and year. Clipper is a non-food retail supply chain logistics operator. The company continued to see weaker volume trends given the dismal U.K. retail environment. We believe Clipper’s focus on e-fulfillment and other services that enable customers to provide e-commerce and omni-channel capabilities position the company well for the future. An information-technology firm, accesso develops solutions such as virtual queuing, ticketing, point of sales, group ticketing and guest management for entertainment and leisure venues ranging from theme parks to sporting events and cultural attractions. During the quarter, the company adopted IFRS 15, an International Financial Reporting Standard providing guidance on accounting for revenue from contracts with customers, which resulted in lower-than-expected restated organic growth. The company has also made strategic acquisitions and has invested heavily in developing new products, which has hindered results in the short term, but should position the company well for long-term growth. The company’s leadership in paid-admission solutions, recent announcements of contract wins and partnerships with Google and Groupon helped to confirm our positive view of accesso’s prospects.

Japan was a volatile market during the quarter, and our holdings underperformed their benchmark counterparts. Over the past three months, we saw a risk-off trend where many of our stocks with high growth expectations and high valuations sold off. These included Yume No Machi Souzou Iinkai Co. Ltd., Open Door, Inc. and Rakus Co. Ltd. All three companies have been investing for the future, enhancing what we believe is their tremendous headroom for growth. Yume No Machi provides online food-delivery services like Grubhub or Delivery Hero in Japan. The company updated its mid-term plan and released lower-than-expected operating profit margin targets. Given the growth opportunities, management believes that investing more heavily to gain market share is prudent. While we are disappointed with the revision, we believe the company’s market leading position and investments will drive future performance. Open Door is an online travel comparison website similar to in the U.S. The company’s most-recent results were in line with our expectations, but given the volatility in the market, the stock sold off. The company is pioneering the travel comparison website industry in Japan and has been quickly building up scale and network effects. We are excited about the growth we anticipate for Open Door. Rakus is a provider of SaaS (Software-as-a-Service) for small to medium-size businesses in areas including expense management, mail services and electronic invoicing. The company has been seeing strong growth and has also been funding sales and marketing initiatives to drive future growth. We believe both the opportunity and our investment thesis for Rakus remain intact.


Global growth appears to have peaked but seems likely to continue expanding at a moderate pace. However, rising global barriers to trade, normalization of central-bank monetary policy and rising interest rates could affect that growth. In addition to investors digesting this economic transition, there was also a significant increase in outflows from foreign equity funds, which we believe contributed to indiscriminate selling pressure across global markets. We have been seeking to take advantage of the many great buying opportunities that have resulted.

In the United Kingdom, ongoing Brexit negotiations continue to create uncertainty, though we remain optimistic regarding the prospects of our U.K. holdings. Our holdings tend to be disruptive, innovative companies and are therefore less dependent on a healthy domestic backdrop than more-traditional companies. We are monitoring the fundamentals of U.K. companies that we consider high quality. While the state of political affairs in the U.K. remains uncertain, we believe that markets tend to overshoot both on the positive and the negative side and we are starting to see compelling opportunities.

Trends in Continental Europe continue to weaken. Our holdings are positioned across the Nordic countries (Denmark, Norway and Sweden) and the core continental European countries including Germany and France. Current headwinds in Europe appear external, particularly in the countries in which the portfolio has holdings, and domestic trends remain relatively stable. Valuations relative to other developed regions are also becoming more compelling.

We continue to be excited about our opportunity set in Japan. Japan’s micro- and small-cap market is one of the most dynamic and vibrant in the world, while also being one of the most inefficient. A weaker yen, political stability, solid corporate fundamentals and attractive valuations provide support for the investment environment in the short to medium term. In the long term, new-generation companies and management teams, corporate reform and improved corporate governance drive our optimism for investing in Japan.

We remain confident in the ability of our companies across the globe to navigate turbulent environments by virtue of their experienced management teams, solid business models and strong competitive positions. These companies are also characterized by their strong balance sheets and cash flows, which allow them to invest throughout business cycles and take market share from competitors. We remain optimistic regarding their long-term prospects given recent meetings and calls with management teams, which point to continued investment in their businesses.

Thank you for the opportunity to manage your assets.


*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 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. (

**As of December 31, 2018, Wasatch International Micro Cap portfolios were not invested in Haidilao International Holding Ltd.

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.

An initial public offering (IPO) is a company’s first sale of stock to the public.

“Risk-off” is when investors become more cautious and take money out of the market, not being willing to risk it, thus risk off.

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 International Micro 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 International Micro 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.