WASATCH FUNDS - Curian Clearing

WASATCH EMERGING INDIA FUND (WAINX) — Management Discussion
MARCH 31, 2015 (UNAUDITED)
The Wasatch Emerging India Fund is managed by a team of
Wasatch portfolio managers led by Ajay Krishnan.
Ajay Krishnan, CFA
Lead Portfolio Manager
OVERVIEW
In the first quarter of 2015, the
Wasatch Emerging India Fund gained
5.76%. The Fund narrowly outpaced its
benchmark, the MSCI India Investable
Market Index, which rose 5.52%.
India continued to benefit from lower
oil prices. Because the country imports
about 80% of its oil, Brent crude’s decline
of 48% over the past year has brought
down India’s current-account deficit and
rate of inflation. Those developments, in
turn, helped shore up the currency and boosted inflows of
foreign capital. The improved backdrop enabled the Reserve
Bank of India to cut interest rates twice during the first
quarter to stimulate economic growth.
While falling energy and commodity prices have lowered
production costs and boosted the profits of Indian companies,
top-line growth has been uninspiring. In the first quarter,
the consumer-staples sector was the Fund’s largest
source of outperformance, as our companies benefited from
margin expansion and persistent demand for their products.
Our lack of investments in energy companies also helped the
Fund by avoiding direct exposure to what proved to be the
worst-performing sector of the Index.
DETAILS OF THE QUARTER
Our two strongest contributors to Fund performance for
the quarter were Lupin Ltd. and Natco Pharma Ltd. Both
companies manufacture branded and generic pharmaceuticals
and market them in India and other countries. Lupin
is experiencing strong demand for its generic formulations
and continues to execute well. The company also is benefiting
from its excellent record with the U.S. Food and Drug
Administration (FDA) and its significant number of new
drugs completing registration and entering production.
Natco’s pipeline is impressive as well. The company has 34
applications for new drugs filed with the FDA and 22 more
pending. It plans to launch its generic form of the multiplesclerosis
drug Copaxone later this year. Shares of Natco rose
sharply in the first quarter on news it had won approval to
market a generic version of Gilead’s new Hepatitis C drug,
Sovaldi, in India and 90 other countries.
HCL Technologies Ltd. was our third-largest contributor.
HCL is an information-technology (IT) company that provides
infrastructure-management services in India, the U.S.
and other countries. It has been especially successful at
winning contracts that have come up for rebidding. Net
income at the company jumped 28.0% in its most-recently
reported quarter on 13.4% sales growth versus the same
period a year ago. On a three-year horizon, we expect continued
strong demand for its services to make HCL an
ongoing holding in the Fund.
Our greatest detractor from performance for the quarter
was India’s largest non-banking finance company, Mahindra
& Mahindra Financial Services Ltd. Through its network of
branches, Mahindra finances purchases of tractors, utility
vehicles, cars and homes, primarily in rural India. Although
sales rose 11.3% year-over-year in the company’s mostrecently
reported quarter, earnings declined as weakness in
southern India and a below-average monsoon season led to an
uptick in non-performing loans. We view this as a temporary
setback inherent in the uneven nature of the company’s business
and continue to own the stock in the Fund.
Two other weak stocks in the Fund were La Opala RG Ltd.
and TD Power Systems Ltd. Opala makes tableware, including
opalware dinner sets and crystal. The company’s share
price declined on investor concerns that top-line growth
may be slowing. We think these fears are overdone, however,
and remain optimistic about Opala’s long-term prospects.
TD Power manufactures and sells electric-power generators
in India and internationally. Despite a 23.1%
increase in sales, the company posted a small loss in its
most-recently reported quarter compared to a small gain in
the year-ago period. We believe this is a high-quality company
positioned to make further inroads into European and
Japanese markets, while also benefiting from planned
upgrades to India’s railroad system and other infrastructure.
OUTLOOK
Even though the Indian government expects gross domestic
product (GDP) to have increased 7.4% during the fiscal
year ended March 31, pockets of weakness and lackluster
sales growth have raised investor concerns. On the plus side,
public finances have improved significantly, with the fiscal
deficit over the same period projected to come in at 4.1% of
GDP, the lowest in seven years. With recent auctions of coal
licenses and mobile-telephone airwaves having added billions
of dollars to government coffers, we believe the Modi
government is likely to deliver on its ambitious plans for
improving India’s roads, ports and power plants.
Streamlining India’s bureaucracy may prove more difficult,
especially given its contentious political culture and
decentralized system of government. Even so, such reforms
are crucial for economic development. The maze of regulations,
taxes and fees imposed by the country’s 29 states
have dropped India to 142 out of 189 countries on the
World Bank’s latest Ease of Doing Business Index. In areas
such as contract enforcement and construction permits,
India ranks even lower.
One initiative in which the government is making significant
headway involves using biometric-enhanced ID
cards to reduce fraud in its welfare system and provide
benefits more efficiently to hundreds of millions of poor
people. Other encouraging signs include progress on a
proposed national sales tax. Known as the “goods-andservices
tax,” the measure would transform India into a single
market for the first time and pave the way for further
expansions in commerce and manufacturing.
Thank you for the opportunity to manage your assets.
Current and future holdings are subject to risk.
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