Open to existing shareholders. Open to new shareholders investing directly with Wasatch Funds.

Transcription

1 Wasatch International Opportunities Fund (WAIOX/WIIOX) Quarterly Comments from Portfolio Managers Jared Whatcott, CFA and Linda Lasater, CFA and Associate Portfolio Manager Allison He, CFA Open to existing shareholders. Open to new shareholders investing directly with Wasatch Funds. Average Annual Total Returns For Periods Ended December 31, 2018 Quarter* 1 Year 3 Years 5 Years 10 Years International Opportunities Fund Investor % % 4.33% 5.08% 14.08% International Opportunities Fund Institutional % % 4.65% 5.27% 14.19% The inception of the Fund s Institutional Class shares was 2/1/2016. The differences in performance relative to the Fund s Investor Class for the longer periods are not as significant as the differences in performance for the shorter periods because the performance of the Institutional Class for the longer periods includes performance of the Fund s Investor Class using the actual expenses of the Investor Class without any adjustments. When the Institutional Class has its own performance history for the longer periods, the performance of the Fund s Institutional Class will differ more significantly from, and be higher than, the performance of the Fund s Investor Class because the expenses of the Institutional Class are lower than those of the Investor Class. MSCI ACWI ex USA Small Cap Index** % % 3.82% 1.96% 10.02% MSCI World ex USA Small Cap Index % % 3.85% 2.25% 10.06% *Returns less than one year are not annualized. Data show 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 visit 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: Investor Class 2.24% / Institutional Class Gross: 2.04%, Net: 1.96% Total Annual Fund Operating Expenses include operating expenses, including the management fee, before any expense reimbursements by the Advisor. The Advisor has contractually agreed to limit certain expenses of the Fund s Investor Class to 2.25% and of the Fund s Institutional Class to 1.95% through at least 1/31/2019. 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

2 reflected, would reduce the performance quoted. For more complete information including charges, risks and expenses, read the prospectus carefully. Performance for the Institutional Class prior to 2/1/2016 is based on the performance of the Investor Class. Performance of the Fund s Institutional Class prior to 2/1/2016 uses the actual expenses of the Fund s Investor Class without any adjustments. For any such period of time, the performance of the Fund s Institutional Class would have been substantially similar to, yet higher than, the performance of the Fund s Investor Class, because the shares of both classes are invested in the same portfolio of securities, but the classes bear different expenses. Investing in foreign securities, especially in frontier and emerging markets, entails special risks, such as currency fluctuations and political uncertainties, which are described in more detail in the prospectus. Investing in micro cap funds will be more volatile and loss of principal could be greater than investing in large cap or more diversified funds. An investor should consider investment objectives, risks, charges and expenses carefully before investing. To obtain a prospectus, containing this and other information, visit or call Please read the prospectus carefully before investing. OVERVIEW The International Opportunities Fund Investor Class was down % for the fourth quarter, while the benchmark MSCI ACWI (All Country World Index) ex USA Small Cap Index fell %. For the year, the Fund declined % compared to the benchmark s loss of %. There was no shortage of news throughout the year to dampen the enthusiasm in the markets. Examples included tension among some global trading partners, the financial and political issues plaguing Italy, political uncertainty in countries like Sweden and Australia, rising interest rates as central bankers in parts of the world began normalizing monetary policy, and weakening economic indicators in some countries, particularly China. Global growth remains positive but has become less broad based. We expect further volatility in the markets and tempered company outlooks as we enter 2019.

3 While macro-related events and economic cycles can impact companies in the short term, our view is that the underlying value of the Fund s holdings will persist over the longer term because they are high-quality companies as evidenced by their enduring competitive advantages, outstanding business models and management teams, and strong balance sheets and cash flows. Such companies have the ability to adapt quickly, continue to invest in their businesses, and take advantage of uncertainty and disruption to grow from cycle to cycle. In uncertain times such as we experienced in 2018, we believe quality is key and we are confident that our high-quality, long-duration growth companies have the potential to be able to navigate turbulent markets and emerge stronger. DETAILS OF THE QUARTER The fourth quarter, particularly the month of October, saw an abrupt reversal in developed equity market trends. During the quarter, the Fund underperformed its benchmark with Japan and the United Kingdom weighing heavily on performance. For the full year, although our Japanese holdings were down and subtracted from the Fund s return, they outperformed the benchmark s position in Japan. In the U.K., our holdings were down for the year and detracted from performance relative to the benchmark. Overall, our emerging-market names held up better than their developed-market counterparts in the fourth quarter, given their better relative value coming into the quarter after seeing weaker performance earlier in the year. China was the Fund s top contributor for the 12 months ended December 31, 2018 with Yihai International Holdings Ltd. and Vitasoy International Holdings Ltd. driving performance. Yihai benefited from the initial public offering (IPO) of its former parent and largest customer, Haidilao International Holding Ltd., one of China s most-popular hotpot restaurant chains. Yihai manufactures and sells hotpot soup flavorings, hotpot dipping sauces and Chinese-style compound condiments under the Haidilao brand name. Yihai s stock, despite a December decline, gained more than 145% in Vitasoy produces and sells soy milk, teas, and tofu products in China, Hong Kong, Southeast Asia and Australia. The company s Go Deep, Go Wide expansion strategy in China

4 continued to deliver strong growth in the country. Both Yihai and Vitasoy also delivered strong quarterly results and contributed to the Fund s fourth-quarter performance. Denmark and Taiwan were also top contributors for the year. Our only holding in Denmark is Royal Unibrew A/S, a regional beverage provider primarily in Denmark, Finland, Italy, Germany and the Baltic countries. Throughout the year, Royal Unibrew announced strong results and was able to acquire new brands to expand the company s geographic reach and penetration. Taiwan s TCI Co. Ltd. was the Fund s top contributor for all of TCI is a contract manufacturer of health food supplements. Strong trends in new distribution channels like WeChat drove abnormally high growth. While the company has an industry-leading position, a high valuation led us to trim our position as the stock price rose. For the fourth quarter, India was the Fund s top contributor to performance. We rounded up on many of our Indian holdings when they were weak in the first half of Many of these names rebounded in the fourth quarter. Gulf Oil Lubricants India Ltd. is the second most dominant company in the auto-lubricants market in India. During the quarter, it seemed that input costs may have peaked and that margins may rise going forward. V-Mart Retail Ltd. is a value fashion apparel retailer in cities where there are no formal retailers. Our meeting with management in India during the quarter gave us confidence in the company s potential to grow 15% or more annually over the long term. Berger Paints India Ltd., the second-largest decorative-paint company in India, was also a strong contributor. In the quarter, the company announced it would be hiking prices to fully protect margins, which was viewed positively by investors. In the U.K., Brexit weighed heavily on consumer sentiment and created uncertainty among businesses. Clipper Logistics plc and accesso Technology Group plc were detractors for the quarter and year. Clipper is a non-food retail supply chain logistics operator. The company continued to see weaker volume trends given the dismal U.K. retail environment. We believe Clipper s focus on e-fulfillment and other services that enable customers to provide e-commerce and omni-channel capabilities position the company well for the future. An information-technology firm, accesso develops solutions such as virtual queuing, ticketing, point of sales, group ticketing and guest management

5 for entertainment and leisure venues ranging from theme parks to sporting events and cultural attractions. During the quarter, the company adopted IFRS 15, an International Financial Reporting Standard providing guidance on accounting for revenue from contracts with customers, which resulted in lower-than-expected restated organic growth. The company has also made strategic acquisitions and has invested heavily in developing new products, which has hindered results in the short term, but should position the company well for long-term growth. The company s leadership in paid-admission solutions, recent announcements of contract wins and partnerships with Google and Groupon helped to confirm our positive view of accesso s prospects. Japan was a volatile market during the quarter, and our holdings underperformed their benchmark counterparts. Over the past three months, we saw a risk-off trend where many of our stocks with high growth expectations and high valuations sold off. These included Yume No Machi Souzou Iinkai Co. Ltd., Open Door, Inc. and Rakus Co. Ltd. All three companies have been investing for the future, enhancing what we believe is their tremendous headroom for growth. Yume No Machi provides online food-delivery services like Grubhub or Delivery Hero in Japan. The company updated its mid-term plan and released lower-than-expected operating profit margin targets. Given the growth opportunities, management believes that investing more heavily to gain market share is prudent. While we are disappointed with the revision, we believe the company s market leading position and investments will drive future performance. Open Door is an online travel comparison website similar to kayak.com in the U.S. The company s most-recent results were in line with our expectations, but given the volatility in the market, the stock sold off. The company is pioneering the travel comparison website industry in Japan and has been quickly building up scale and network effects. We are excited about the growth we anticipate for Open Door. Rakus is a provider of SaaS (Software-as-a-Service) for small to medium-size businesses in areas including expense management, mail services and electronic invoicing. The company has been seeing strong growth and has also been funding sales and marketing initiatives to drive future growth. We believe both the opportunity and our investment thesis for Rakus remain intact. (Current and future holdings are subject to risk.)

6 OUTLOOK Global growth appears to have peaked but seems likely to continue expanding at a moderate pace. However, rising global barriers to trade, normalization of central-bank monetary policy and rising interest rates could affect that growth. In addition to investors digesting this economic transition, there was also a significant increase in outflows from foreign equity funds, which we believe contributed to indiscriminate selling pressure across global markets. We have been seeking to take advantage of the many great buying opportunities that have resulted. In the United Kingdom, ongoing Brexit negotiations continue to create uncertainty, though we remain optimistic regarding the prospects of our U.K. holdings. Our holdings tend to be disruptive, innovative companies and are therefore less dependent on a healthy domestic backdrop than more-traditional companies. We are monitoring the fundamentals of U.K. companies that we consider high quality. While the state of political affairs in the U.K. remains uncertain, we believe that markets tend to overshoot both on the positive and the negative side and we are starting to see compelling opportunities. Trends in Continental Europe continue to weaken. Our holdings are positioned across the Nordic countries (Denmark, Norway and Sweden) and the core continental European countries including Germany and France. Current headwinds in Europe appear external, particularly in the countries in which the Fund has holdings, and domestic trends remain relatively stable. Valuations relative to other developed regions are also becoming more compelling. We continue to be excited about our opportunity set in Japan. Japan s micro- and smallcap market is one of the most dynamic and vibrant in the world, while also being one of the most inefficient. A weaker yen, political stability, solid corporate fundamentals and attractive valuations provide support for the investment environment in the short to medium term. In the long term, new-generation companies and management teams, corporate reform and improved corporate governance drive our optimism for investing in Japan.

7 We remain confident in the ability of our companies across the globe to navigate turbulent environments by virtue of their experienced management teams, solid business models and strong competitive positions. These companies are also characterized by their strong balance sheets and cash flows, which allow them to invest throughout business cycles and take market share from competitors. We remain optimistic regarding their long-term prospects given recent meetings and calls with management teams, which point to continued investment in their businesses. Thank you for the opportunity to manage your assets. Sincerely, Jared Whatcott, Linda Lasater and Allison He **The MSCI ACWI ex USA Small Cap Index is an unmanaged index and includes reinvestment of all dividends of issuers located in countries throughout the world representing developed and emerging markets, excluding securities of U.S. issuers. This index is a free float-adjusted market capitalization index designed to measure the performance of small capitalization securities. The MSCI World ex USA Small Cap Index is a free float-adjusted market capitalization weighted index designed to measure the equity market performance of developed markets, excluding the United States. You cannot invest in these or any indexes. 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 indexes. 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. ( CFA is a trademark owned by CFA Institute. The Wasatch International Opportunities Fund s investment objective is long-term growth of capital. As of December 31, 2018, the Wasatch International Opportunities Fund was not invested in Haidilao International Holding Ltd.

8 Brexit is an abbreviation for British exit, which refers to the June 23, 2016 referendum whereby British citizens voted to exit the European Union. The referendum roiled global markets, including currencies, causing the British pound to fall to its lowest level in decades. An initial public offering (IPO) is a company s first sale of stock to the public. Risk-off is when investors become more cautious and take money out of the market, not being willing to risk it, thus risk off. Valuation is the process of determining the current worth of an asset or company. International Opportunities Fund Top 10 Holdings as of September 30, 2018 Percent of Security Name Net Assets Pro Medicus Ltd. (Australia) 3.0% Open Door, Inc. (Japan) 2.4% Webjet Ltd. (Australia) 2.3% Hypoport AG (Germany) 2.3% Yume No Machi Souzou Iinkai Co. Ltd. (Japan) 2.1% Rakus Co. Ltd. (Japan) 1.9% Philippine Seven Corp. (Philippines) 1.8% Yihai International Holding Ltd. (China) 1.8% TCI Co. Ltd. (Taiwan) 1.7% ASA International Group plc (United Kingdom) 1.5% Total 20.7% Portfolio holdings are subject to change at any time. References to specific securities should not be construed as recommendations by the Fund or its Advisor. Current and future holdings are subject to risk. WAS /30/2019