Insights / September 24, 2019

Japan: Land of Generational Change

Japan’s positive direction is leading to attractive investment opportunities.

In the post-World War II period from 1960 through 1990, Japan enjoyed exponential economic growth. By 1989, following 10% average annual gross domestic product (GDP) growth throughout the 1960s and 5% growth throughout most of the 1970s, Japan was the second-largest global economy.

The economic boom spilled into homes around the world. Even as (Yokohama-based) JVC pitted its VHS recorders against (Tokyo-based) Sony’s Betamax format, new Japanese products like the Sony Walkman and the Nintendo Entertainment System became revolutionary global icons. Meanwhile, Japan saw its overall manufacturing base rise to dominant levels, becoming the world’s largest automotive manufacturer in 1980, thanks to the efforts of companies like Nissan, Honda and Toyota. As the 1980s concluded, eight of the top 10 global companies by market capitalization were Japanese, with Japan astonishingly accounting for 45% of all global market capitalization.

But 1991 would prove the asset-price bubble that had developed over five years unsustainable as Japan dramatically entered a prolonged period of halted economic growth. By 2009, what had been dubbed “the lost decade” that began in 1991 had stretched into the “lost score” or “lost 20 years,” as Japan’s Nikkei 225 Index dipped nearly 80% below its 1989 high.

Unsurprisingly, this dramatic reversal of fortunes during the 1990s and 2000s presented a very tough backdrop for investors to make money and no doubt continues to give some investors pause. When we raise the topic of investing in Japan, we typically receive comments like “Japan’s population is shrinking,” “the economy isn’t growing” and “Japan has been in deflation for two decades.” While these comments are true, they miss a big part of the real picture regarding what’s happening in Japan.

Fortunately, since 2012, we’ve identified a number of positive changes—many of which have been sparked by policies introduced by Prime Minister Shinzo Abe, collectively known as “Abenomics.” Not only is Japan the largest country allocation in the international developed market universe, based on the MSCI EAFE Index, but in our view it also remains one of the most misunderstood. In this paper, we discuss some of our reasons for being optimistic regarding Japan and highlight some of the sustainable improvements we’ve been seeing in Japan’s market environment.

In Japan, there’s long been a tradition of incremental innovation. This tradition is embodied in the Japanese word kaizen, which literally means to “make better.” The kaizen philosophy was first used to increase the efficiency of the manufacturing process. Today, kaizen is broadly applied in business and is the process of making continual improvements in managing all aspects of a company’s operations—from inventory and production to marketing and administration. Over time, the cumulative effect of small, innovative changes can be significant. The benefits of practicing kaizen may include increasing sales, reducing costs, improving supply chains, gaining market share and providing additional cash to invest in growing the business.

Following the December 2012 Japanese general election, newly elected Prime Minister Abe introduced an economic framework based on “three arrows”—economic policy, fiscal stimulus and structural reforms. The first two arrows were aimed at fighting deflation and providing a more immediate boost to the economy. The third arrow of Abenomics is intended to have a medium- to long-term impact with initiatives aimed at goals such as improving corporate governance, encouraging companies to have more independent directors, boosting business competitiveness, increasing productivity and obtaining better mobility in the labor force.

The broad array of initiatives comprising this third arrow makes it more complex and harder to understand. Similar to the kaizen notion of slow, incremental change, we’ve even heard the third arrow referred to as “one thousand needles” given the sheer number of policies and initiatives. In addition to those mentioned above, other initiatives are targeted at specific industries or segments of the economy and are intended to stimulate changes in business and consumer behavior. The changes we’ve seen occurring as a result of third-arrow initiatives have opened up more interesting and attractive investment opportunities and are part of our growing optimism for investing in Japan.

Many of Prime Minister Abe’s initiatives are aimed at addressing the challenges Japan faces. For example, Japan has a labor shortage—which is depicted by the following graph. From May 2018 to June 2019, the job openings-to-applicants ratio rose above 1.60, which was the highest level seen for decades. With an aging population, Japan is extending the retirement age. We witnessed this during a recent research trip when an 80-year-old man drove us in a taxi. Another Abe initiative dubbed “womenomics” seeks to encourage women to enter the workforce with policies aimed at improving the childcare-support system, creating a more women-friendly work environment, and bolstering cooperation between the government and companies to facilitate better work/life balance. It’s also a great time to be a young person in Japan. We regularly hear from management teams that they’re hiring students right out of college, hiring more part-time employees and even starting to embrace the concept of outsourcing.

With unemployment near multi-decade lows at 2.3%, this is leading to modest wage inflation in some parts of the economy—but isn’t obvious when looking at overall economic statistics given the structure of the labor market. In 2018, the official part-time employee ratio was nearly 24%, which is up from 19.6% a decade ago. And although Japan’s wages have been rising, part-time employees earn much less than full-time equivalents. This spread is even more dramatic when including employee benefits such as health care. A more vibrant employment picture is typically a positive indicator for increased consumer spending and economic activity. The quagmire in Japan’s case is that consumers are saving instead of spending. In Japan, the gross household savings rate as a percentage of GDP increased from 23.5% in 2012 to 27% in 2018. Our research indicates incremental saving is going into areas like health care, due to an aging society and a desire by young people to assist their parents during the golden years. In our opinion, this is one issue Prime Minister Abe needs to address.

One of Abenomics’ more important reform initiatives focuses on improving corporate governance. Adam Smith once wrote that obtaining “rank among our equals is perhaps the strongest of all our desires.” Japan has taken this approach to heart in addressing a corporate culture that traditionally placed the priorities of internal stakeholders over those of investors.

In 2014, “after decades of de-prioritizing shareholders’ economic interests and low corporate profitability, Japan introduced the JPX-Nikkei400,” a new Index that “highlighted the country’s ‘best-run’ companies by annually selecting the 400 most profitable of its large and liquid firms,” according to a study published in 2017 by Harvard Business School’s Journal of Financial Economics. Shortly after the unveiling of the JPX-Nikkei400, and in keeping with Abenomics’ third arrow, the Japanese state-run Government Pension Investment Fund (the world’s largest pension fund) expressed formal endorsement of the Index, simultaneously lending greater consequence to well-run corporate cultures among Japanese companies.

Since its inception, some have dubbed the JPX-Nikkei400 the “shame index,” with the same researchers noting that the effort is the “first instance of a central government deploying a stock index as a primary policy tool to change a persistent behavioral outcome.” In short, the experiment appears to have worked, with firms vying for inclusion in the exclusive group. “Many excluded firms aspired to gain entry; many included firms feared future expulsion,” the researchers wrote. The direct impact of such changes are difficult to directly quantify, but high-end estimates suggest the novel use of corporate peer pressure may have impacted the valuation of as much as 13% of Japan’s total market capitalization in 2014.

Moreover, since these reforms were undertaken, we’ve seen shareholders demand better performance and corporate directors and management teams become more focused on shareholders. This trend has been evident in improving financial metrics such as return on equity (ROE). One reason ROE had been historically low in Japan was because corporations held excess cash on their balance sheets. Over the past few years, companies have been starting to deploy this excess cash, using it either to grow their businesses or to return cash to shareholders in the form of dividends and/or share buybacks. Indicating the improvements in Japan, the following chart shows the ROE—along with other portfolio metrics—for the Japanese holdings in the Wasatch International Small Cap Growth strategy versus the benchmark MSCI All Country (AC) World ex-USA Small Cap Index.

Corporate Japan is embracing initiatives such as the stewardship code and the corporate governance code. And there’s a welcome trend toward more independent directors. In 2014, 21.5% of the companies in the TOPIX—which tracks the First Section of the Tokyo Stock Exchange (TSE)—had two or more independent directors. Now, as shown in the chart below, more than 93% of those companies do.

More and more Japanese companies are embracing shareholder-friendly practices, which has led to an increasing subset of companies that meet Wasatch’s strict quality standards. At Wasatch, we focus on small-cap, high-quality, long-duration growth companies. And we now have a bigger universe of stocks to choose from in Japan. During the past five years, we’ve seen the number of companies in the small-cap quality universe increase by more than 50%. In 2012, there were fewer than 300 Japanese listed companies with market capitalizations between US$250 million and US$5 billion and ROEs greater than 10%. Now, there are more than 500 companies with that profile.

Not only is the universe of high-quality companies increasing, but Japan also remains an inefficient and misunderstood market—which provides ample opportunities for investors willing to dig in and do the work. Beyond the obvious language barrier, obtaining information on Japanese companies is more challenging than in many of the other countries in which we invest. Many financial reports and presentations are released only in Japanese. This requires us to travel to the country to meet management teams in person in order to understand their business and strategy. On a recent research trip to Japan, we met a company’s executives who told us we were the first foreign investors to meet with them. Add to that a culture unlike any other, and we can see why many investors become frustrated too early in the process. Investing in Japan does require hard work, but we believe the potential rewards are worth the effort.

There’s also a lack of sell-side or broker coverage on Japanese companies. Nearly three-fourths of the listed companies in Japan have just two or fewer analysts researching them. Many of these are small- or micro-cap companies. The following pie chart shows the breakdown of analyst recommendations per Japanese company. We believe the fact that Japanese companies are underfollowed is one reason for the relatively low correlations in the performance of Japanese stocks compared to those in other countries.

The chart below shows the correlation coefficients of stocks in Japan versus four other developed markets and two emerging markets. Notice that the large/mid-cap stocks are not highly correlated, and that the small-cap stocks have even lower correlations.

Next consider the chart below, which shows the correlation coefficients of stocks in several other countries. Notice that developed markets are typically more highly correlated with each other and that correlations tend to fall when emerging markets are included. Also notice that the country correlations with Japan in the chart below are generally lower than the correlations in the first chart above. In fact, correlations with Japan are at levels that are more typical of emerging-market correlations. What conclusions can we draw from these correlation charts? First, because Japan is generally less correlated with other countries, Japanese stocks can provide a strategy with attractive diversification characteristics. Second, small-cap stocks—which are the ones we tend to find most attractive—generally have even lower correlations and therefore offer even better diversification benefits.

We believe Japan has one of the most interesting small-cap markets in the world. A vibrant small-cap market is a sign of an entrepreneurial and innovative environment where investors can plant seeds and watch them grow into tall trees over the long term. Within the MSCI Japan Small Cap Index, more than 85% of the stocks are below a market capitalization of US$3 billion. This compares to the MSCI USA Small Cap Index, where just 42% are below a market capitalization of US$3 billion. A more detailed comparison is provided by the table below. In Japan, we’ve been finding a lot of interesting companies in sectors like information technology and health care, and also companies that are disrupting traditional business practices. Some of our best investments in Japan have been in very small companies that have grown to boast multi-billion-dollar market caps.

Two examples of interesting Japanese companies we’ve found are GMO Payment Gateway, Inc. and M3, Inc. GMO Payment Gateway is one of more than 100 subsidiaries of GMO Internet, Inc., the largest conglomerate of internet companies within Japan. GMO Payment Gateway provides payment processing services for credit cards, convenience stores, and online shopping, as well as for sales through catalogs and TV. Currently, the company’s payment services are used by nearly 106,000 vendors. The success of the company’s offerings saw its revenue grow by more than 25% year-over-year, while its online payments business increased by just over 32%.

M3 is a health-technology company that’s flourished by helping pharmaceutical companies more effectively deliver drug information to doctors online. Leveraging its doctor network and technology platform, M3 entered the contract research organization (CRO) space a few years ago and has become one of the top CRO companies in Japan. M3’s platform automates and optimizes portions of the clinical-trial process to help bring drugs to market faster and less expensively.

Another sign of a healthy business environment is the number of initial public offerings (IPOs). In the five years ended December 31, 2018, Japan led the number of IPOs at 458 versus other developed international countries like the United Kingdom at 386, Australia at 428 and Sweden at 253. A robust IPO market means that entrepreneurs are able to access an efficient way to capitalize their businesses and grow. We see Japan’s IPO market as providing a more dynamic small-cap universe and future investment opportunities.

The following graph shows the performance of Japanese markets versus U.S. markets over the past 10 years. While all of these markets suffered during the global financial crisis, they have since recovered—with U.S. markets having risen the most, potentially to the point of reaching some of the higher valuations in the world. Japanese markets, we believe, have greater upside potential. And Japanese small caps, even considering their outperformance of large/mid caps since the global financial crisis, have the most headroom for further growth.  The table below shows the average annual total returns and the annualized standard deviations of the MSCI Japan Index (large/mid caps) versus the MSCI Japan Small Cap Index. What’s interesting to note is that the standard deviation—one measure of risk—is lower for the Japan Small Cap Index over five years and 10 years despite small caps having better returns than large/mid caps during these periods.


When it comes to innovation, Japan is a global leader. Here, again, the assimilation of the kaizen concept into the corporate culture shines through. Japanese research and development spending as a percentage of nominal GDP is the fourth highest in the world and has been increasing over the last two decades as shown in the graph below. In 2018, a Japanese scientist was awarded the Nobel Prize in Medicine, which was the 19th Nobel Prize for Japan since 2000, making it the third-largest recipient of Nobel Prizes this century—trailing only the United States and the U.K. (among whose cumulative winners are an additional five Nobel laureates either born in or claiming citizenship in Japan). And in early 2019, Japan led the list of Derwent (formerly Clarivate Analytics) Top 100 Global Innovators with a total of 39 companies.

MISUMI Group, Inc., a current Wasatch holding, was established in 1963 and has grown to become a leading manufacturer of dies and factory items such as nuts and bolts. MISUMI’s corporate mission statement and history shows a commitment to kaizen. In 2014, the company won the “innovations in manufacturing processes” award from the Japan Management Association. The company is an industry leader in logistics, where scale and speed are important metrics. With a heavy investment in rapid logistics between Japan, China and Vietnam, MISUMI has also entered the maintenance, repair and operations (MRO) business. Combine the radical innovation of big ideas being brought to market by Japan’s entrepreneurs and the incremental innovations of practicing kaizen, and you get a dynamic business culture that can hold its own on the world stage and provide attractive opportunities for investors.

We’re witnessing a generational change unfold in Japan. There’s a wave of younger and more vibrant CEOs leading Japan’s companies of the future. We look for CEOs who understand Japan’s economic landscape but bring a different perspective, perhaps having worked or been educated abroad. When SoftBank Group Corp. listed in 1994, it was a small-cap stock. But the company now boasts a US$90 billion-plus market cap. SoftBank’s founder and now Chairman, Masayoshi Son, was educated in the United States. His vision and ability to adapt the business over the years led to the company’s success.

Another important change we’re seeing in Japan is management teams’ willingness to do things differently. Despite Japan’s reputation as a technological leader, its online sector has been slower to develop than one might expect. But this is changing. We’ve been finding many interesting Japanese companies where management teams understand what makes a successful business model or what are the best practices being used by companies globally, and seek to replicate them in their own businesses. Given the social and cultural barriers, it’s very difficult for large global companies to penetrate the Japanese market—leaving a lot of opportunities for local entrepreneurial companies to more fully develop their industries.

The level of patent applications is one measure of a country’s willingness to try new things. By this measure, as indicated in the chart below, Japan is a global leader. In many of Japan’s industries, traditional distribution channels had been entrenched. But now we see more companies willing to disrupt those channels, and they often use technology to enable this. A good example is Wasatch holding MonotaRO Co. Ltd. The company created an online distribution channel for the maintenance, repair and operations (MRO) industry. MonotaRO provides customers with a solution that is less expensive, is delivered faster and provides outstanding customer service compared to traditional-channel rivals. Furthermore, we believe MonotaRO is building a sustainable competitive advantage with a strong infrastructure in the form of technology (including integration with customers’ systems) and a physical warehouse presence nationwide. MonotaRO is a leading online player in the MRO industry, yet controls just 2% of the industry in Japan. That figure could go much higher, in our view. We see tremendous potential for Japanese companies willing to do things differently, especially as market reforms take place.

Japan is home to many fragmented industries. In much of the developed world, a few large companies generally come to dominate some 60% to 70% of a given industry. That figure is approximately 40% in Japan, but is moving toward the global average with factors like wage and cost inflation acting as catalysts for change. We’re drawn to companies that can capitalize on this opportunity by consolidating their industries and gaining market share from their competitors. Japan’s pharmacy industry is a good example. Wasatch investment Ain Holdings, Inc. is one of the largest pharmacy operators in Japan with over 1,000 locations out of a total of more than 50,000 locations for the industry as a whole. Ain has doubled in size over the last five years, yet the company still has less than 2% market share. In the U.S., the four top pharmacy companies (Walgreens, CVS, Rite Aid and Walmart) control the majority of the retail pharmacy industry. Over time, we believe the consolidation trends that have happened elsewhere will also occur in Japan. In our opinion, the economics are clearly aligned with that trend, especially given the shareholder-
friendly reforms being enacted by many companies.

One cannot rely solely on current economic data to gauge the success of these initiatives. But our on-the-ground research in Japan tells us that changes happening at the micro level are real, and being in the country helps us understand these more subtle changes. Members of the Wasatch research team travel regularly to Japan and have a firsthand account of how the business environment has evolved over time. Our firsthand knowledge combined with our analysis of corporate and country-level financial data have prompted us to significantly increase our allocation to Japanese stocks. Most importantly, we believe Japan provides ample opportunities for investors willing to commit the time and resources to understand the environment and the companies.

Our optimism for investing in Japan is supported by Abenomics, and particularly by third-arrow initiatives that are being embraced by corporations. The adoption of many of these initiatives has helped to broaden the universe of attractive small-cap companies available to investors in Japan. Improving corporate governance has led to improving financial metrics for many companies.

Despite being one of the largest developed economies in the world, Japan’s market is still inefficient and misunderstood by many investors, which provides opportunities for hands-on investors like Wasatch to find companies with outstanding investment potential. Being on the ground in Japan, we’ve uncovered a wealth of innovative small companies that are ripe for investment. We believe Japan is headed in a positive direction. We’re seeing this from the bottom up by analyzing the investment potential of individual companies.

We see a vibrant culture of innovation and entrepreneurship giving rise to exciting small companies that have significant headroom for growth by consolidating their industries, expanding their geographic reach and using technology to take market share from their competitors. At Wasatch, we’re committed to investing in small-cap, high-quality, long-duration growth companies. In Japan, we’re seeing sustainable improvements in the market environment that are supportive of the kinds of small companies in which we like to invest.

We believe Wasatch is uniquely positioned to exploit present and future opportunities in developed, emerging and frontier markets. We’re willing to dig deep to find these opportunities. And we have a proven track record of doing so. Past performance is not indicative of future results.

Wasatch Global Investors was founded in 1975 as a small cap growth investment boutique. The firm has spent over 40 years developing unique expertise in the small- and micro-cap space. We launched our first international product in 2000 and have continued to build our international team since then.

To take full advantage of the inefficiencies and opportunities available internationally, portfolio managers and analysts must be willing to do on-the-ground research in order to gain a true understanding of the companies and their markets. A Wasatch cornerstone has always been the deep due diligence applied to each investment we make. Our portfolio managers and analysts regularly travel the world to meet with management teams, who sometimes mention just how rare it is for them to actually get a visit from an investor.
Wasatch believes its deep due diligence can better determine a company’s growth potential, financial stability and management quality. The Wasatch heritage is “bottom-up,” which means analyzing the investment potential of individual companies.

Another key element of Wasatch’s approach is cross-team collaboration. For example, we don’t send one person to Japan to determine the best companies in that country. We send a team of members with different backgrounds in order to get a more robust understanding of each company. This team gets together with portfolio managers and analysts who have been trekking through other parts of the world, as well as with the U.S. team, to compare companies from around the globe to help select investments that appear to have the best potential.

Wasatch’s research team consists of 34 portfolio managers and securities analysts. Each team member is dedicated to the collaborative, hands-on research process the firm employs in managing its mutual funds and institutional separate accounts.

Wasatch Global Investors pursues a disciplined approach to investing, focused on bottom-up, fundamental analysis to develop a deep understanding of the investment potential of individual companies. In making investment decisions, the portfolio managers employ a uniquely collaborative process to leverage the knowledge and skill of the entire Wasatch research team.
Wasatch Global Investors is an employee-owned investment advisor founded in 1975 and headquartered in Salt Lake City, Utah. The firm had $18.5 billion in assets under management as of June 30, 2019. Wasatch Global Investors is registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940.


Investing in foreign securities entails special risks, such as currency fluctuations and political uncertainties, which are described in more detail in the prospectus. Investing in small- and micro-cap funds will be more volatile and loss of principal could be greater than investing in large cap or more diversified funds.

Diversification does not eliminate the risk of experiencing investment losses.

Information in this document regarding market or economic trends or the factors influencing historical or future performance reflects the opinions of management as of the date of this document. These statements should not be relied upon for any other purpose. Past performance is no guarantee of future results, and there is no guarantee that the market forecasts discussed will be realized.
The investment objective of the Wasatch International Growth Fund is long-term growth of capital.

Portfolio holdings are subject to change at any time. References to specific securities should not be construed as recommendations by Wasatch Global Investors. Current and future holdings are subject to risk.

As of June 30, 2019, the percentage of shares outstanding held by the Wasatch International Small Cap Growth strategy (representative account) in the following companies was: GMO Payment Gateway, Inc. 1.0%; M3, Inc. 1.1%; MISUMI Group, Inc. 1.8%; Ain Holdings, Inc. 0.9% and MonotaRO Co. Ltd. 1.1%.
As of June 30, 2019, the Wasatch International Small Cap Growth strategy (representative account) did not hold SoftBank Group Corp., CVS Health Corp., Rite Aid Corp., Walgreens Boots Alliance, Inc. or Walmart Stores, Inc.

Abenomics refers to the economic policies advocated by Japanese Prime Minister Shinzo Abe after his December 2012 re-election to the post he last held in 2007. His aim was to revive the sluggish economy with “three arrows”—a massive fiscal stimulus, more aggressive monetary easing from the Bank of Japan, and structural reforms to boost Japan’s competitiveness.

The Derwent Top 100 Global Innovators (formerly Clarivate Analytics) methodology is based on four principal criteria: overall patent volume, patent application-to-grant success rate, global reach of the portfolio and patent influence as evidenced by citations. The peer-reviewed methodology was executed using Clarivate solutions including Derwent World Patents Index (DWPI) and Derwent Patent Citations Index (DPCI). The index provides editorially enhanced, authoritative and accurate patent data, and is trusted by more than 40 patent offices worldwide.

Correlation, in the financial world, is a statistical measure of how asset classes, securities, markets, or countries move in relation to each other. The correlation coefficient is a number between -1.0 and 1.0. If there were no relationship between two variables, the correlation coefficient would be 0. As the strength of the relationship between the two variables increases, so does the correlation coefficient. A perfect positive fit gives a coefficient of 1.0. A perfect negative fit gives a coefficient of -1.0.

Earnings-per-share or EPS is the portion of a company’s profit allocated to each outstanding share of common stock. EPS growth rates help investors identify companies that are increasing or decreasing in profitability.

EBIT (earnings before interest and taxes) is a measure of a firm’s profit that includes all expenses except interest and income tax expenses. It is the difference between operating revenues and operating expenses. EBIT is also called “operating earnings,” “operating profit,” or “operating income.”

EBIT ROA is the ratio of EBIT to the total capital invested in operating assets.

The global financial crisis, also known as the financial crisis of 2007-09 and 2008 financial crisis, is considered by many economists to have been the worst financial crisis since the Great Depression of the 1930s.

Gross domestic product (GDP) is a basic measure of a country’s economic performance and is the market value of all final goods and services made within the borders of a country in a year.

An initial public offering (IPO) is a company’s first sale of stock to the public.

The JPX-Nikkei Index 400 is a capitalization-weighted index of 400 companies from the First Section, Second Section, JASDAQ and Mothers of the Tokyo Stock Exchange (TSE).

Long-Term Debt-to-Capital is a company’s debt as a percentage of its total capital. Debt includes all short-term and long-term obligations. Total capital includes the company’s debt and shareholders’ equity, which includes common stock, preferred stock, minority interest and net debt.

The Nikkei 225 Stock Index is a price-weighted index of the 225 top Japanese companies (called the First Section) that are listed on the Tokyo Stock Exchange (TSE).

Return on Assets (ROA) measures a company’s profitability by showing how many dollars of earnings a company derives from each dollar of assets it controls.

Return on Equity (ROE) measures a company’s efficiency at generating profits from shareholders’ equity.

Standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. In finance, standard deviation is applied to the annual rate of return of an investment to measure the investment’s volatility. Standard deviation is also known as historical volatility and is used by investors as a gauge for the amount of expected volatility.

The Tokyo Stock Price Index, commonly known as TOPIX, is a free-float adjusted market capitalization-weighted index that is calculated based on all the domestic common stocks listed on the Tokyo Stock Exchange (TSE) First Section. It is calculated and published by the TSE.

Valuation is the process of determining the current worth of an asset or company.

Correlation coefficients are based on the following MSCI country indexes and MSCI country small cap indexes. The MSCI Japan Index is designed to measure the performance of the large and mid cap segments of the Japanese market. With 323 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in Japan. The MSCI France Index is designed to measure the performance of the large and mid cap segments of the French market. With 79 constituents, the index covers about 85% of the equity universe in France. The MSCI Germany Index is designed to measure the performance of the large and mid cap segments of the German market. With 64 constituents, the index covers about 85% of the equity universe in Germany. The MSCI USA Index is designed to measure the performance of the large and mid cap segments of the U.S. market. With 639 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in the U.S. The MSCI United Kingdom Index is designed to measure the performance of the large and mid cap segments of the U.K. market. With 97 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in the U.K. The MSCI India Index is designed to measure the performance of the large and mid cap segments of the Indian market. With 78 constituents, the index covers approximately 85% of the Indian equity universe. The MSCI China Index captures large and mid cap representation across China H shares, B shares, Red chips, P chips and foreign listings (e.g. ADRs). With 491 constituents, the index covers about 85% of this China equity universe. Currently, the index also includes large cap A shares represented at 10% of their free float adjusted market capitalization. The MSCI Japan Small Cap Index is designed to measure the performance of the small cap segment of the Japanese market. With 973 constituents, the index represents approximately 14% of the free float-adjusted market capitalization of the Japan equity universe. The MSCI France Small Cap Index is designed to measure the performance of the small cap segment of the French equity market. With 78 constituents, the index represents approximately 14% of the free float-adjusted market capitalization in France. The MSCI Germany Small Cap Index is designed to measure the performance of the small cap segment of the German market. With 111 constituents, the index represents approximately 14% of the free float-adjusted market capitalization of the Germany equity universe. The MSCI USA Small Cap Index is designed to measure the performance of the small cap segment of the U.S. market. With 1,804 constituents, the index covers approximately 14% of the free float-adjusted market capitalization in the U.S. The MSCI UK Small Cap Index is designed to measure the performance of the small cap segment of the U.K. equity market. With 269 constituents, the index represents approximately 14% of the free float-adjusted market capitalization in the U.K. The MSCI India Small Cap Index is designed to measure the performance of the small cap segment of the Indian market. With 261 constituents, the index represents approximately 14% of the free float-adjusted market capitalization of the India equity universe. The MSCI China Small Cap Index is designed to measure the performance of the small cap segment of the China market. With 237 constituents, the index represents approximately 14% of the free float-adjusted market capitalization of the China equity universe. The MSCI All Country (AC) World 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 EAFE Index is an equity index that captures large and mid cap representation across developed market countries around the world, excluding the U.S. and Canada. With 923 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. 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 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. (

The Russell 2000 Index is an unmanaged total return index of the smallest 2,000 companies in the Russell 3000 Index. The Russell 2000 is widely used in the industry to measure the performance of small company stocks. You cannot invest directly in this or any index.

The Wasatch International Small Cap Growth strategy has been developed solely by Wasatch Global Investors. The Wasatch International Small Cap Growth strategy is not in any way connected to or sponsored, endorsed, sold or promoted by the London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). FTSE Russell is a trading name of certain of the LSE Group companies.

All rights in the Russell 2000 Index vest in the relevant LSE Group company, which owns the Index. Russell® is a trademark of the relevant LSE Group company and is used by any other LSE Group company under license.

The Index is calculated by or on behalf of FTSE International Limited or its affiliate, agent or partner. The LSE Group does not accept any liability whatsoever to any person arising out of (a) the use of, reliance on or any error in the Index or (b) investment in or operation of the Wasatch International Small Cap Growth strategy or the suitability of the Index for the purpose to which it is being put by Wasatch Global Investors.

The S&P 500 Index includes 500 of the United States’ largest stocks from a broad variety of industries. The Index is unmanaged and is a commonly used measure of common stock total return performance. You cannot invest directly in this or any index.