WASATCH FUNDS - Curian Clearing

WASATCH MICRO CAP VALUE FUND (WAMVX) — Management Discussion
MARCH 31, 2015 (UNAUDITED)
The Wasatch Micro Cap Value Fund is managed by a team
of Wasatch portfolio managers led by Brian Bythrow.
Brian Bythrow, CFA
Lead Portfolio Manager
OVERVIEW
For the first quarter of 2015, the
Wasatch Micro Cap Value Fund gained
5.78% in what was a positive period for
micro-cap equities. The Fund outperformed
its benchmark, the Russell
Microcap Index, which rose 3.14%.
Stocks of small companies outpaced
large-company stocks as the U.S. dollar
continued to climb against most foreign
currencies. A rising greenback cuts
the value of revenues earned overseas
and makes companies focused on U.S. markets more attractive.
Because large companies typically have a greater global
presence than small companies, micro caps benefited from
the dollar’s first-quarter strength.
Although the Fund normally does not hedge its foreigncurrency
exposure, we used a forward currency contract to
blunt the impact of the euro’s decline against the dollar.
With stocks in the U.S. valued more richly than in the rest of
the world, our international holdings did well in the first
quarter and added to Fund performance. By allowing the
Fund to retain most of the gains in our euro-denominated
stocks, the currency hedge was another factor that helped
the Fund to surpass its benchmark.
Holding no energy companies in the Fund also helped
performance by avoiding direct exposure to what was the
worst-performing sector of the Index for the third quarter in
a row. However, we used the weakness in energy as an
opportunity to add companies from other sectors whose
businesses are tied to energy production.
Health-care companies continued to benefit from strong
demand and favorable demographic trends. Despite the
Fund’s modest holdings in the soaring biotechnology
industry, advantageous stock-picking enabled our healthcare
stocks to outgain the benchmark’s health-care positions.
Our information-technology stocks also outpaced the
benchmark’s holdings and provided the Fund’s largest
source of outperformance.
The lesser-known, often under-researched character of
micro-cap stocks can sometimes cause their prices to be
driven by perceptions rather than company fundamentals.
In the first quarter, the weak performance of our industrials
suggested that investors believed our industrial companies
have more overseas revenues and greater currency exposure
than they actually do.
DETAILS OF THE QUARTER
Nobilis Health Corp., in connection with its physician
partners, develops, owns and operates outpatient-surgery
centers. Consisting of private investment in public equity
(PIPE) and warrants, the Fund’s position in Nobilis was its
largest contributor to performance for the quarter. Amid
strong operating results and increased attention from
investors, the company’s securities have soared in value.
While we continue to hold the warrants, we sold the equity
shares to manage the overall size of the position.
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Our second-largest contributor was Ebix, Inc., which
provides software and e-commerce solutions to the
insurance industry. After having overcome a series of challenges
that included an investigation by the Securities and
Exchange Commission, Ebix now appears positioned to
resume its growth.
Gentherm, Inc., the third-largest contributor to Fund
performance, manufactures individualized climate-control
systems for automobile seats, steering wheels and cup holders.
Shares of Gentherm rebounded during the first quarter
when investor concerns about an imminent downturn in
global sales of automobiles proved unfounded.
The greatest detractor from Fund performance for the
quarter was MusclePharm Corp., a company that sells
sports-nutrition products in the U.S. and internationally.
MusclePharm’s share price fell sharply when management
reported a wider-than-expected loss. Higher spending to
support the company’s ambitious marketing initiatives has
delayed its move to profitability and disappointed investors.
Transportation company Saia, Inc. was our secondlargest
detractor. Saia specializes in less-than-truckload
shipments in the U.S. trucking market. Its strong competitive
position had enabled the company to pass along
higher fuel costs to customers in the form of fuel surcharges.
With energy prices now falling, however, investors
fear that this source of revenue may be curtailed. These
concerns do not materially impact our long-term outlook
for Saia, and we continue to own it in the Fund.
Acacia Research Corp. was our third-largest detractor. In
addition to helping small companies protect their patents
against infringement by large competitors, Acacia negotiates
patent licensing agreements between patent owners and
licensees, and purchases patent portfolios for its own development
and legal enforcement. The company’s share price
fell sharply in January when it lost an important patentinfringement
case against several large corporations. We sold
the stock to seek better opportunities elsewhere.
OUTLOOK
With the Federal Reserve (Fed) expected to begin raising
interest rates later this year, we think U.S. equity markets may
face some short-term headwinds. Historically, transitions to
monetary tightening after a cycle of monetary easing have
been choppy, as investors try to anticipate the precise timing
of the shift in policy. In the current circumstance, the Fed’s
decision is complicated by a rising dollar, falling energy prices
and a U.S. economy that may be losing steam.
Meanwhile, we continue to find equity valuations much
more attractive outside the U.S. As central banks in Europe
and Japan extend their quantitative-easing programs, we also
think the near-term environment for international equities
may be more favorable. Recent additions to the Fund have
consisted largely of international companies, and we expect to
remain focused on finding high-quality international microcaps
with exciting long-term growth prospects.
Thank you for the opportunity to manage your assets.
Current and future holdings are subject to risk.