WASATCH FUNDS - Curian Clearing

WASATCH LARGE CAP VALUE FUND (FMIEX / WILCX) — Management Discussion
MARCH 31, 2015 (UNAUDITED)
The Wasatch Large Cap Value Fund is managed by a team
of Wasatch portfolio managers led by David Powers.
David Powers, CFA
Lead Portfolio Manager
OVERVIEW
The Wasatch Large Cap Value Fund
— Investor Class was down -0.31% for
the first quarter of 2015 and slightly
outperformed its benchmark, the
Russell 1000 Value Index, which
lost -0.72%.
U.S. large-cap stocks traded without
clear direction over the quarter, despite
ongoing signs of strengthening in the
domestic economy. The employment
backdrop continued to improve, and
consumers also benefited from the recent decline in oil
prices. The U.S. Federal Reserve maintained its message that
the inevitable tightening of monetary policy would be
measured, given an inflation rate that has remained below
target and lackluster wage growth.
For the benchmark, health-care and consumerdiscretionary
stocks led returns, while informationtechnology
and utilities stocks lagged. In the Fund, our
health-care stocks trailed the Index, but our performance in
information technology and industrials and lack of ownership
in utilities helped returns relative to the Index.
DETAILS OF THE QUARTER
Leading individual contributors included consumerelectronics
icon Apple, Inc. Apple has continued to benefit
from better-than-anticipated sales of its latest iPhone model.
Revenues, earnings and margins have exceeded expectations
in recent quarters. In addition, Apple has continued to showcase
its ability to bring innovative new products to market,
most recently with the introduction of a new smartwatch.
Shire plc was another leading contributor to the Fund’s
return. Shire specializes in the acquisition and development
of so-called “orphan” drugs that are designed to treat rare
diseases. The stock became attractive when a competitor
walked away in October 2014 from a bid to acquire the
company, giving investors an opportunity to buy growth at
an inexpensive valuation.
Leading wireless provider Verizon Communications, Inc.
rebounded after lagging in the prior quarter. Verizon has
been subject to balance sheet management concerns since
borrowing heavily to buy Vodafone’s stake in Verizon’s
wireless business in early 2014. It was also feared that Verizon
would overextend itself in the U.S. government’s
November 2014 auction of wireless spectrum. However, the
consensus regarding Verizon’s spectrum purchases was that
the company’s actions were reasonable in relation to peers
and the company’s overall financial picture.
On the downside, Canadian integrated oil company
Suncor Energy, Inc. saw its share price decline, largely due to
continued softening in oil prices. The decline in oil has
impacted not only the profitability of Suncor’s oil sands
assets, but also forced the company to mark down the value
of its refining inventory. We believe Suncor’s refining
activities provide a measure of insulation from oil price
volatility relative to pure exploration and production firms.
Household products firm Kimberly-Clark Corp. also lagged
in the quarter. The company’s results have been constrained
by the strong upward move in the U.S. dollar. In addition,
foreign currency movements also impacted results in key
international markets. Kimberly-Clark was the first consumerstaples
company to announce an earnings miss in the wake of
these currency-related factors, and we believe the stock suffered
disproportionately over the short term as a result.
Eastman Chemical Co. is a commodities and specialtychemicals
company with a vast line of products used in a
wide variety of industrial production processes, ranging
from adhesives to plastics to paint additives. The company’s
results are heavily tied to the overall global economic climate,
and have suffered from softening demand outside the
U.S., especially in China. The rise in the dollar has also
weighed on results. We view these negative factors as shortterm
issues, and the stock price as attractive relative to the
company’s earnings.
It is worth noting that we continue to hold meaningful
positions in Suncor, Kimberly-Clark and Eastman despite
their weak performance for the quarter. It can take several
quarters — and even several years — for our investment
thesis for a company to play out, so a weak quarter is typically
not a reason to sell. Oftentimes, a drop in stock price is
an opportunity to add to our position if we believe our thesis
remains intact.
OUTLOOK
The U.S. economy appears positioned to continue to
strengthen for some time, with employment numbers showing
meaningful improvement against a favorable backdrop
of low interest rates, low inflation and low oil prices. One
factor that bears monitoring as conditions strengthen is the
impact on corporate margins of any cycle of wage increases
for U.S. workers.
There are also concerns about the extent to which sub-par
growth overseas may act as a headwind with respect to further
progress, but we are optimistic that these obstacles
should not be overly disruptive to the U.S. economy.
Company valuations in general are high and we see few
opportunities to add interesting names to the Fund. That
said, we are evaluating the degree to which the recent decline
in energy-related stocks may have created long-term opportunities.
In addition, we are considering the extent to which
utility stocks may continue to benefit from the low cost of
capital at current interest-rate levels, and what price level for
the sector would suggest an attractive entry point.
More broadly, the Fund is positioned with a strong tilt
toward what we consider to be high-quality, largercapitalization
stocks. This area of the market is not only
where we see the best relative value, but also the potential to
provide support for the Fund should the economy and
markets surprise to the downside. As always, we will continue
to apply our rigorous process to stock selection.
We thank you for your continued confidence and investment
in the Fund.
Current and future holdings are subject to risk.
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