The Wasatch Emerging Markets Small Cap fund (WAEMX, quote) has the highest return out of the 5 star emerging market mutual funds ranked by Morningstar.
Portfolio manager of the fund Laura Geritz says it’s a rigorous screening process that has enabled them to have an average annual return over the last three years of 26.3%, which is after their expense ratio of 1.95% has been deducted.
According to the prospectus, the fund is not without volatility. The annualized return in 2008 was -57.08%, 117.72% in 2009, 41.22% in 2010 and -14.01% in 2011. However, they did outperform the iShares MSCI Emerging Markets Index (EEM, quote) for all years except 2008. Despite extraordinary returns in 2009 and 2010, the overall return since inception in October 2007 is 2.58%.
The fund has $1.2 billion invested and currently owns 98 stocks.
Wasatch defines a fund as small cap if 80% of the holdings are in companies that have market caps of three billion or less. As of the most recent quarter, the weighted average market cap of the companies in the fund was $1.9 billion.
The top ten emerging market holdings and their respective percentage of the funds’s net assets are: Restoque Comercio e Confeccoes de Roupas S.A. (Brazil) 2.05%, Mr Price Group Ltd. (South Africa) 2.03%, Colgate-Palmolive India Ltd. (India) 1.87%, PT Mitra Adiperkasa Tbk (Indonesia) 1.81%, Security Bank Corp. (Philippines) 1.78%, Universal Robina Corp. (Philippines) 1.67%, International Container Terminal Services, Inc. (Philippines) 1.61%, Trinity Ltd. (China) 1.53%, Koza Altin Isletmeleri A.S. (Turkey) 1.51%, and Chroma ATE, Inc. (Taiwan) 1.46%.
Geritz says they have been following a strategy that Wasatch has had in place for a very long time: “We only want to own the best fundamental companies with the best sustainable competitive advantages that we can find across the emerging markets.”
This entails a rigorous screening process of opportunities in all emerging market countries with the objective of finding the highest quality companies. The companies chosen are those with the best balance sheets, cash flow statements, and return on capital that will deliver the highest returns.
Geritz says they don’t invest in a theme because it’s exciting, rather they seek emerging market companies that have the proper numbers to support their growth. Wasatch also does not use sell side coverage, so everything is done based on their own independent research.
WAEMX does not invest in emerging market companies without visiting management in their respective countries. Geritz herself has been to 11 countries since the beginning of 2012. Geritz says travelling is an important part of their strategy and that they strictly adhere to the screening process, followed by travelling to the company and meeting management.
The strategy is bottom up and Geritz looks at the best emerging market companies regardless of what country they are located in. However they do also look at macro conditions if they believe they may impact the growth rate of the company.
WAEMX is broadly diversified to all regions of the world with investments in the emerging market regions of Latin America, Europe, the Middle East and Africa, but it has a greater concentration of investments in Asia than other continents.
As part of risk management, Geritz says their focus on cash flows and balance sheets protects them in a down market. If a company has generated good cash flow over time and can self-fund their growth, it means they don’t need to go to the capital markets to grow their businesses. This offers protection as they generally are not subject to changing borrowing conditions.
Geritz says the rigorous screening process is one key to WAEMX’s success. She adds that an advantage for WAEMX is that they have been running this process successfully for decades domestically and they are now applying it to international and emerging markets.
Geritz emphasizes that because Wasatch’s strategy works, the same process is applied across all their products. She is now applying her strategies as lead manager of the recently launched Wasatch Frontier Emerging Small Countries (WAFMX, quote).