The Wasatch Frontier Emerging Small Countries Fund (WAFMX) completed its first year with strong performance driven by stock picks in Nigeria and the Philippines. According to Morningstar, the Fund’s absolute rank was #1 out of 553 Diversified Emerging Markets funds based on total return for the 12 months ending January 31, 2013. Portfolio Manager Laura Geritz attributes the strong results to good security selection and a focus on stocks benefiting from local economic growth, not developed-country demand. From inception on January 31, 2012 through January 31, 2013, the Wasatch Frontier Emerging Small Countries Fund was up 36.17% versus 20.94% for the MSCI Frontier Emerging Markets Index and 16.73% for the MSCI Frontier Markets Index (which is highly skewed toward the value markets in the Middle East). For the 11 months ending December 31, 2012, the Wasatch Frontier Emerging Small Countries Fund was up 32.16% versus 15.41% for the MSCI Frontier Emerging Markets Index and 8.69% for the MSCI Frontier Markets Index Data shows past performance, which is not indicative of future performance. Current performance may be lower or higher than the data quoted. To obtain the most recent month-end performance data available, please click here . The Advisor may absorb certain Fund expenses, without which total return would have been lower. Investment returns and principal value will fluctuate and shares, when redeemed, may be worth more or less than their original cost. Total Expense Ratio: 3.64%, Net: 2.25% We asked Ms. Geritz some questions about frontier markets and the Fund’s first year: First, how do you define frontier markets and emerging small countries, and why do you believe there are investment opportunities in such areas? These are the smaller countries that many believe to be a subset of emerging markets. We invest in publicly listed companies across Asia, Africa, the Americas, the Middle East and Europe. The long-term fundamentals of places like Sri Lanka, the Philippines, Nigeria, Kenya, Colombia, Peru, Mexico and Turkey continue to converge with the developed world, and benefit from demographic advantages and healthier balance sheets. Plus, the asset class offers attractive dividend yields.
We believe frontier markets and the smaller countries among traditional emerging markets represent significant long-term opportunities for investors willing to do their homework and put boots on the ground. Many companies in frontier markets and emerging small countries have limited analyst coverage and offer untapped growth potential. We believe these markets are in the early stages of a long-term investment cycle. Our goal is to find the next generation of potentially large emerging markets – the next BRICs (Brazil, Russia, India, China), Koreas and Taiwans.Your Fund has a significant weighting in Africa, particularly Nigeria. What opportunities do you see there? The key markets in Sub-Saharan Africa – Nigeria and Kenya – were among the world’s top performers over the past 12 months. The common thread is that these markets are the least tied to outside events – mainly the whims of developed-markets politicians. And many have had strong political and economic news over the last few years. One of my biggest frustrations about Africa is investor and media ignorance of it. Sub-Saharan Africa has all the right ingredients to be a multi-decade story for investors in frontier markets – great demographics, low debt levels, low correlations with global markets, strong economic growth and increasing consumer demand. Not to mention it is a continent of beauty with charming, friendly people. What other countries do you like? We like the Philippines, given its low credit penetration and impeccable demographics. Turkey has also been a breath of fresh air compared to the rest of Europe, which is still wrestling with debt. In addition, we like Egypt with its large population and stunning demographics. Pakistan, a world market leader last year, has controlled inflation while reducing interest rates, which has meant a bump in consumer spending and stock-market performance. Countries like Bangladesh and Sri Lanka, though they’ve lagged, are likely to benefit from their robust demographics and low cost of labor, taking share from places like China where manufacturing has gotten more expensive. What investment themes traverse these economies? Fifty-three percent of the Fund is in consumer staples. Most of the companies we invest in generate sales in their local markets and benefit from growing populations and increased consumer demand. A recent video of our visits to companies in Nigeria, Egypt, Morocco and the Philippines shows some of these consumer-driven opportunities. To watch the video on YouTube, click here or go to: www.youtube.com/wasatchfunds. Are frontier markets fairly valued? Frontier markets trade at a trailing P/E ratio of 10.6 on average, a significant discount to emerging markets in general, which trade at a P/E ratio of 12.7 on average. Growth and economic fundamentals in frontier markets are also good, especially compared to overall weak global economic growth. Plus, frontier markets continue to see decent inflows with trading volumes recently picking up.
Frontier markets lagged emerging markets overall in 2012, and there was significant disparity between individual markets in the MSCI Frontier Emerging Markets Index. Individual country performance was relatively uncorrelated, providing an additional layer of potential diversification as each market is driven by unique factors. We look for pockets of opportunity where markets and stocks are inexpensive compared to their growth potential.Does your Fund have similar country weightings as the Index? No. The Fund has significant flexibility to pursue returns differently from the Index. Compared to the MSCI Frontier Emerging Markets Index, our country allocations are more broadly diversified with very different weightings. For example, 59% of the Index is accounted for by its four most heavily weighted countries (Colombia, the Philippines, Kuwait and Peru). The Fund’s four highest weightings are a completely different group (Nigeria, Kenya, South Africa and Sri Lanka) and represent 47% of its non-cash assets. How should investors incorporate frontier markets and emerging small countries into their portfolios? A fund like ours is a diversifier for an investor’s portfolio. Because these markets are more heavily driven by local (home-country) demand, they tend to be less correlated with the rest of the world. To learn more about the Frontier Emerging Small Countries Fund and Wasatch’s view on emerging markets in general, please refer to the white paper, Emerging Markets: A Case for Targeted Approaches. In addition to the Frontier Emerging Small Countries Fund, Wasatch also manages the Emerging Markets Small Cap Fund (WAEMX) and the Emerging Markets Select Fund (WAESX). About Laura Geritz, CFA Ms. Geritz joined Wasatch Advisors in 2006 and serves as the Lead Portfolio Manager of the Wasatch Frontier Emerging Small Countries Fund. She also serves as a Portfolio Manager of the Emerging Markets Small Cap Fund and the International Opportunities Fund with Roger Edgley, Wasatch’s Director of International Research. Prior to joining Wasatch Advisors, Ms. Geritz was with Mellon Corporation. She received a Bachelor of Arts degree in Political Science and History and a Master’s degree in East Asian Languages and Cultures from the University of Kansas. About Wasatch Advisors ® Wasatch Advisors is the investment manager to the Wasatch Funds ®, a family of no-load mutual funds, as well as separately managed institutional and individual portfolios. Wasatch Advisors pursues a disciplined approach to investing, focused on bottom-up, fundamental analysis to develop a deep understanding of the investment potential of individual companies. The portfolio managers employ a uniquely collaborative process to leverage the knowledge and skill of the entire Wasatch Advisors research team in making investment decisions. Wasatch Advisors is an employee-owned investment advisor founded in 1975 and headquartered in Salt Lake City, Utah. The firm had $14.2 billion in assets under management as of January 31, 2013. Wasatch Advisors, Inc. is registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940. RISKS AND DEFINITIONS: The Morningstar absolute rank is the rank of a fund among its category peers, which rank is based on a comparison of a fund’s total return performance against its peers over the stated time period (in this case, the 12 months since inception of the Wasatch Frontier Emerging Small Countries Fund). Past performance is no guarantee of future results. © 2013 Morningstar, Inc. All rights reserved. The information contained herein (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Total Annual Fund Operating Expenses include direct expenses paid to the Advisor, before any expense reimbursements by the Advisor. The Advisor has contractually agreed to limit certain expenses to 2.25% through at least January 31, 2014. See the prospectus for additional information regarding Fund expenses. Wasatch Funds will deduct a 2.00% redemption proceeds fee on Fund shares held 60 days or less. Performance data does not reflect the deduction of fees or taxes, which if reflected, would reduce the performance quoted. For more complete information including charges, risks and expenses, read the prospectus carefully. Mutual fund investing involves risks and loss of principal is possible. Investing in small cap funds will be more volatile and loss of principal could be greater than investing in large cap or more diversified funds. Investing in foreign securities, especially in frontier and emerging markets, entails special risks, such as unstable currencies, highly volatile securities markets and political and social instability, which are described in more detail in the prospectus. Being non-diversified, the Fund can invest a larger portion of its assets in the stocks of a limited number of companies than a diversified fund. Non-diversification increases the risk of loss to the Fund if the values of these securities decline. An investor should consider investment objectives, risks, charges and expenses carefully before investing. To obtain a prospectus, containing this and other information, visit www.WasatchFunds.com or call 800.551.1700. Please read the prospectus carefully before investing. The MSCI Frontier Emerging Markets and MSCI Frontier Markets indices are free float-adjusted market capitalization indices designed to measure equity market performance in the global frontier and emerging markets. You cannot invest in these or any indices. Source: MSCI. The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties or originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages. ( www.msci.com ) The investment objective of the Wasatch Frontier Emerging Small Countries Fund, the Wasatch Emerging Markets Small Cap Fund and the Wasatch Emerging Markets Select Fund is long-term growth of capital. The Wasatch Frontier Emerging Small Countries Fund and the Wasatch Emerging Markets Select Fund are new and have limited operating history that is not likely to be duplicated and may not be indicative of future long-term returns or rankings. Dividend yield is a company’s annual dividend payments divided by its market capitalization, or the dividend per share divided by the price per share. For example, a company whose stock sells for $30 per share that pays an annual dividend of $3 per share has a dividend yield of 10%. Correlation, in the financial world, is a statistical measure of how asset classes, securities, markets, or countries move in relation to each other. The Price-to-Earnings or P/E ratio is the price of a stock divided by its earnings per share. CFA ® is a trademark owned by CFA Institute. Separately Managed Accounts and related investment advisory services are provided by Wasatch Advisors, Inc., a federally regulated Investment Advisor. © 2013 Wasatch Funds. All rights reserved. Wasatch Funds are distributed by ALPS Distributors, Inc. (ADI). Steve Rung is a registered representative of ADI. ADI is not affiliated with Wasatch Advisors, Inc. WAS003003 4/20/2013