WASATCH FUNDS - Curian Clearing

WASATCH SMALL CAP VALUE FUND (WMCVX / WICVX) — Management Discussion
MARCH 31, 2015 (UNAUDITED)
The Wasatch Small Cap Value Fund is managed by a team
of Wasatch portfolio managers led by Jim Larkins.
Jim Larkins
Lead Portfolio Manager
OVERVIEW
Domestic small-cap value stocks rose
slightly during the first quarter of 2015,
as gauged by the 1.98% return of the
Fund’s benchmark, the Russell 2000
Value Index. The Wasatch Small Cap
Value Fund — Investor Class delivered
a robust gain of 8.24% and comfortably
outperformed the benchmark on the
strength of our individual stock
selection. Our stock picks performed
particularly well in the energy,
consumer-discretionary and financials sectors, all of which
outperformed their benchmark counterparts. We believe
our success in these areas underscores our longstanding view
that the small-cap value universe offers abundant stockspecific
opportunities, even when trends in individual sectors
— or the stock market as a whole — are unfavorable.
DETAILS OF THE QUARTER
Among the Fund’s three underlying strategies, our Fallen
Angel discipline performed well and followed through on its
strong fourth quarter of 2014. This strategy includes companies
that we extensively research, often for years, and then
purchase when short-term developments cause their valuations
to fall to attractive levels. Early in 2015, many of these
Fallen Angels reversed temporary missteps and accelerated
internal business momentum, resulting in strong stock price
gains. We believe this helps illustrate the essential role of
patience in value investing.
A good example of our patient process in action is Fallen
Angel Ebix, Inc., a supplier of software and services used by
insurance companies and brokers that finished the quarter
as the Fund’s top performer. We established our current
position in Ebix in July 2013, when the stock collapsed after
a proposed buyout offer was withdrawn due to a regulatory
investigation. We had known the company for many years
and had owned the stock previously, so we understood some
of the controversies that could arise. However, our research
showed Ebix to have a strong, valuable, and cash-generating
business, which gave us the confidence to invest at a
depressed valuation. When some of the regulatory issues
cleared up and the company once again posted solid results,
the stock surged and made a strong contribution to the
Fund’s first-quarter performance.
Our Quality Value strategy also added value in the quarter
thanks in large part to the strength of our holdings in the
energy sector. During the fourth quarter of 2014 and the
early portion of this year, we focused our energy weight in
companies with stronger balance sheets and healthier underlying
businesses than the average energy company. In turn,
we eliminated energy holdings that we expected to struggle if
energy prices fell further and remained low for a considerable
amount of time. For instance, we exited our investments
in Comstock Resources, Inc., DXP Enterprises, Inc.
and seismic-equipment provider Geospace Technologies
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Corp. At the same time, we chose to add to the Fund’s position
in fuel logistics company World Fuel Services Corp.
following the tumble in oil prices late in 2014. The company
provides improved cost certainty to its customers, which
means that volatile energy prices actually benefit its results.
This indeed proved to be the case, and the stock outpaced
the overall energy sector by a wide margin. Northern Oil and
Gas, Inc. and Ultra Petroleum Corp., also recovered from a
weak fourth quarter to deliver returns well above that of the
overall energy sector.
The Undiscovered Gem portion of the Fund, which emphasizes
stocks with strong fundamentals that haven’t yet been
recognized by Wall Street, also continued to deliver positive
returns. Icon plc, Mallinckrodt plc and Skechers U.S.A., Inc.
were all strong performers during 2014, and all continued to
produce gains in the first quarter of 2015. Auto lender Credit
Acceptance Corp. is a more recent addition to the Fund that
we purchased last year after visiting with the company’s
management team. Credit Acceptance was also among the
leading individual contributors to first-quarter performance.
Acacia Research Corp. is an owner and defender of
intellectual property and patents. Acacia’s stock lost ground
due to a legal setback within its patent library and was our
largest detractor for the quarter. We reduced the position
early in the quarter on concerns about the company’s
business model, which enabled us to sidestep some of the
downside in the stock. Looking forward, some upcoming
court cases could increase the value of Acacia’s intellectualproperty
holdings. Saia, Inc., a shipping and logistics
company that specializes in smaller truckloads, also
underperformed due to concerns about its pricing power.
OUTLOOK
We continue to hold a positive outlook on the economy,
but much of the hoped-for benefits of improving growth
and the “tax cut” from lower energy prices have been factored
into current stock prices. We therefore will not hesitate
to take profits where we think it is prudent, as we are
always focused on finding optimal trade-offs between risk
and return potential. More broadly speaking, we are seeking
to maintain the performance we experienced early in 2015
and to enhance it with new value opportunities as we cast a
wide net across the small-cap space. There are many moving
pieces in the economy right now, with volatile energy prices,
larger-than-normal currency fluctuations, and the potential
for higher interest rates all representing factors that could
potentially create opportunities in the stock market. Our
investment discipline is designed to take advantage of the
inefficiencies, and we will look to exploit opportunities as
they arise.
Thank you for the opportunity to manage your assets.
Current and future holdings are subject to risk.