WASATCH FUNDS - Curian Clearing

WASATCH LONG/SHORT FUND (FMLSX / WILSX) — Management Discussion
MARCH 31, 2015 (UNAUDITED)
The Wasatch Long/Short Fund is managed by a team of
Wasatch portfolio managers led by Michael Shinnick and
Ralph Shive.
Michael Shinnick
Lead Portfolio Manager
Ralph Shive, CFA
Portfolio Manager
OVERVIEW
Six years into
the stock-market
rally, the market is
being driven by
multiple expansion
as earnings growth
slows due to
headwinds from
the strong dollar
and commodity
price declines.
On the long side, we see significant value in the energy fire
sale. We believe aggressive adjustments on the supply side
combined with growing global demand will stabilize energy
prices and act as a catalyst for a cyclical recovery in energy.
Real assets, including energy, provide a hedge against potential
unintended consequences from the unprecedented
global central bank monetary easing.
The Fund’s long positions are in companies that we
believe are high quality and are valued at low teens multiples.
We are hedging against market risk with real assets and
our short portfolio.
For the first quarter of 2015, the Wasatch Long/Short
Fund — Investor Class fell -1.68%, lagging the 0.95%
return of the S&P 500 Index. The vast majority of the
weakness in relative performance was driven by the Fund’s
energy-related exposure. The sharp 50% decline in oil
prices impacted any company with energy exposure. On
the short side of the portfolio, our exposures in aggregate
roseaboutthesameasthemarket,thoughtheimpactwas
minimal given that we were at the low end of our historic
short exposure.
DETAILS OF THE QUARTER
The Fund has had a relatively high allocation to energyrelated
stocks for a number of years, based in large part on
our preference for companies tied to real assets in an era of
money printing by central banks. We believe real assets
provide a valuable hedge against the unintended consequences
of central bank actions.
Within energy, commodity price declines reduced the
outlook for our offshore drillers’ capacity utilization and
day rates. Ensco plc was the Fund’s largest detractor. We
maintained our position, as we believe Ensco is wellpositioned
with a substantial contractual backlog to navigate
conditions until the supply-and-demand backdrop
becomes more favorable.
NOW, Inc., while technically classified as an industrials
stock, was another leading energy-related detractor. Since
NOW provides maintenance and supply services to energy
firms, the company has seen its revenues and margins contract.
We like NOW for its strong balance sheet and ability
to generate free cash flow.
Halliburton Co. and Pioneer Natural Resources Co. were
among the Fund’s top contributors for the quarter. These
green shoots in the energy sector highlight the upside potential
of the cyclical recovery.
The principal shift on the long side of the portfolio was
reducing real-estate investment trust (REIT) exposure. We
harvested gains by closing out a position in Digital Realty
Trust, Inc. and trimmed our weightings in Iron Mountain,
Inc. and American Campus Communities, Inc.
Within information technology, we reduced our holdings
of Apple, Inc. based on the stock’s significant upward move,
and rotated capital into QUALCOMM, Inc. and EMC Corp.
Both companies feature cash-rich balance sheets, low P/E
multiples and strong free cash flow generation.
The principal detractors on the short side were Boeing Co.
and JC Penney Co., Inc. We closed our short position in
Boeing after a stronger-than-expected report. Although JC
Penney’s stock was boosted by holiday-season results that
exceeded expectations, we view the company’s business
model as structurally challenged.
We increased the Fund’s short exposure during the quarter
on the view that extended valuations and slowing growth
rates should result in contracting P/E multiples for such
names as Sprouts Farmers Market, Inc., Five Below, Inc. and
Veeva Systems, Inc.
OUTLOOK AND FUND POSITIONING
In large part due to our energy exposure, the Fund has not
participated in the market’s upside in recent quarters. We’ve
examined the rationale for the Fund’s above-benchmark
allocation to energy from multiple perspectives, and have
made adjustments to our positioning within the sector. We
are maintaining a meaningful overweight in energy based on
the view that the companies we hold possess significant
value not currently recognized by the market.
More broadly, exposure to companies with value propositions
based on real assets has the potential to act as a hedge
against the more-extreme scenarios in a world flooded with
central bank-created currency. This type of hedge will not
always provide near-term results, but we believe it’s consistent
with our concern for preservation and growth of
capital over the long term.
We are pleased to announce that Terry Lally has joined
Wasatch Advisors as a Senior Research Analyst on the Fund’s
portfolio-management team. Before joining Wasatch, Terry
was chief investment officer of Spotlight Funds and Spotlight
Capital Management, which he co-founded in 2007.
Prior to that, he was a portfolio manager and principal with
Cramer Rosenthal McGlynn in New York. A Harvard MBA
and CFA charterholder, Terry began his investment career in
1989 as an analyst with Prudential Investments.
We believe the Fund is well-positioned for the upcoming
investment environment, which we think will include a
recovery in oil and other real assets. Be assured that we take
seriously our responsibilities as stewards of your capital.
Thank you for your continued confidence and investment
in the Fund.
Current and future holdings are subject to risk.
24