WASATCH FUNDS - Curian Clearing

WASATCH INTERNATIONAL OPPORTUNITIES FUND (WAIOX) — Management Discussion
MARCH 31, 2015 (UNAUDITED)
The Wasatch International Opportunities Fund is managed
by a team of Wasatch portfolio managers led by Laura Geritz
and Jared Whatcott.
Laura Geritz, CFA
Lead Portfolio
Manager
Jared Whatcott, CFA
Associate Portfolio
Manager
OVERVIEW
The International
Opportunities
Fund
gained 5.22% for
the quarter ended
March 31, 2015,
beating its
benchmark, the
MSCI All Country
World Ex-U.S.A.
Small Cap Index,
which rose 3.93%.
European equities started the year off strong on the back
of additional stimulus from the European Central Bank.
While investors were hoping that low energy prices, low
interest rates and a weak currency would help get Europe on
its feet again, economic concerns in emerging economies
like Russia, China and Brazil continued to dampen global
growth expectations.
The biggest change in the Fund and global markets over the
past 12 months has been the resurgence of Japan. Japanese
stocks have been benefiting from bottom-up and top-down
initiatives. We have been finding abundant investment opportunities
in the land of the rising sun.
DETAILS OF THE QUARTER
“Every being that exists in the entire world is linked
together as moments in time, and at the same time they exist
as individual moments of time. Because all moments are the
time being, they are your time being.” This quote from Zen
Buddhist teacher Dogen Zenji was cited in Ruth Ozeki’s
recent novel, A Tale for the Time Being. After more than 20
years of mending from a real-estate and economic bubble,
we believe now — in economic and stock-market terms —
is once again Japan’s time being. As a student of the country
and a lover of Japan’s culture and scenery, I waited a long
time for this to happen. I’m encouraged by Prime Minister
Abe’s initiatives and from our bottom-up analysis of Japanese
corporations, and I think Japan’s resurgence might last
longer than in the past.
So why Japan? As many of our investors know, our research
process involves screening a large set of micro-cap companies,
and then traveling the world to dig into the companies that
we believe have the best investment potential. Based on our
recent screening and deep due diligence, Japan has caught our
attention. We are seeing Japanese corporations buying back
shares, lifting wages, paying down debt, increasing dividends,
and engaging in mergers and acquisitions. Best yet, Japan’s
micro-cap stocks remain inexpensive on our metrics. We
believe Japan is propelling its time being.
Our holdings in Japan outdid the strong performance of
the Japanese component of the Index. Our decision to add
to the Fund’s weight in Japan during the quarter meant that
we quickly closed what had been a large underweight gap
relative to the Index.
The Fund’s consumer-discretionary sector aided performance
relative to the Index. Domino’s Pizza Enterprises Ltd., a
franchise-license owner in Australia with operations around
the world, was a top contributor for the quarter. Some of
our larger emerging-market positions like Famous Brands
Ltd., a South African food company, and Berjaya Food Bhd.,
a Malaysian restaurant operator, saw stock-price declines
that detracted from the Fund’s generally strong performance
in the consumer-discretionary sector.
Information technology (IT) was another strong sector
within the Fund. IT and Internet service names EOH Holdings
Ltd.(SouthAfrica)andMyEGServicesBerhad(Malaysia)
continued their strong performance from last quarter.
At about one-third of the portfolio, our biggest sector
weight is consumer staples. This was one of the betterperforming
sectors in the Index during the quarter, and we
gained a lot of relative performance from our overweight
position. Gains in the stock prices of Japanese drug-store
chain Kusuri No Aoki Co. Ltd. and Philippine Seven Corp.
more than offset the decline of Singapore bakery chain
BreadTalk Group Ltd.
The Fund struggled in the financials sector and our holdings
underperformed those in the benchmark. Insurer
British-American Investments Co. Kenya Ltd. (Kenya) was
the biggest detractor in the sector.
Our pharmaceutical stocks were down, while those in the
Index were up. This was the primary reason that, despite the
strong performance of United Arab Emirates health-care
provider NMC Health plc, the health-care sector detracted
from performance relative to the Index.
OUTLOOK
We will be traveling through Japan to meet with companies’
management teams. With many people on Wasatch’s
research team who know Japan well and a history of good
stock-picking in the market, we feel we have the ability to
execute well in this market.
Japan is not the only country where we see positive
changes. After several years of sluggish growth in China, we
are seeing some corporations step up and cut expenses. This
is critical in a slow-growth world where revenue expansion is
hard to come by. Growth has to come from more creative
methods like cost cutting, debt unwinding, share buy backs
and dividends to shareholders.
As we continue to scour the globe for high-quality microcap
companies, we have been increasingly impressed with
the valuations and momentum of companies in Asia, and
Japan in particular. Likewise, we are cognizant of attractive
valuations appearing across Europe. The harder we look, the
more excited we become about the great opportunities we
are uncovering around the world.
Thank you for allowing us to invest your hard-earned
assets. It is a privilege we don’t take lightly.
Current and future holdings are subject to risk.
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