Insights / February 8, 2022

Views on the Market Downturn

Contending With The “Perfect Storm”

To a large extent, stock markets around the world peaked during the fourth quarter of 2021. As such, this paper looks at what occurred in January 2022which was generally representative of the recent, broader hightolow performance.

For our part, we think January’s performance can be explained by several “style” factors. In the bar charts that follow, we present the relative (not absolute) performance of the factorbased components of the smallcap Russell 2000® Index. The factors are derived from Wasatch’s proprietary models and can be described as: growth, value, momentum, leverage and procyclicality. Each bar represents a quintile for the corresponding factor.

GrowthValue and Momentum Factors

In the chart above, we evaluate growth, value and momentum factors. The growth factor is largely based on the past growth of sales and earningsi.e., the operating performanceof companies. The momentum factor is based on stockprice movements prior to January. And the value factor is a hybrid of the operating performance and the price (valuation) paid for that operating performance.

What you see in the chart is that the highergrowth quintiles performed more poorly from a stockprice perspective in January. Similarly, the more expensively valued quintiles also underperformed. But from a momentum standpoint, stocks with the best and the worst momentum coming into January were the bottom performers.

Leverage and Procyclicality Factors

Moving on to leverage and procyclicality, in the chart above you see similar trends across quintiles. Leverage is largelybut not completelybased on a company’s debt independent of its stock price. Procyclicality is a proprietary indicator of sector, industry, company and stockprice sensitivity to economic expansions and contractions.

Some investors may be surprised that in January’s rising interestrate environment, the stocks of the most leveraged (indebted) companies performed the best. But these companies are also some of the most procyclical. And with all the news about higher inflation, it’s not illogical that the procyclical stocks performed well. Procyclical companies typically have more hard assets on their balance sheets and may benefit on a relative basis from inflation and underlying economic strength.

The stocks of highergrowth, assetlight companiessuch as those favored by Wasatchtended to struggle in January. This is because highergrowth companies typically have their cash flows weighted further into the future. Amid rising inflation and interest rates, the present value of future cash flows may be perceived to be worth less.

January notwithstanding, we still favor highergrowth companies for the reasons described below.

The “Perfect Storm”

January witnessed the “perfect storm” of value outperforming growth, positive momentum faltering, negative momentum accelerating, a company’s leverage working to investors’ advantage, and procyclical assetheavy companies gaining favor. Clearly, this storm wasn’t conducive to our approachwhich had previously been favored for several years. In fact, January’s storm moved against us on a relative basis to an even greater extent than during the value surge following Donald Trump’s election victory in 2016. But our bottomup research today indicates that most of our companies have been improving their competi­tive positions and have the potential to come out of this challenging period as even more powerful market leaders.

So, what accounted for the sudden change in the investment climate recently? We believe the change was largely precipitated by the U.S. Federal Reserve’s actions. (Other factors were the effects of the Omicron variant of Covid19, supplychain issues and geopolitical uncertainties.) For years, inflationary pressures had been building and monetary policy had remained accommodativeto a large extent for good reason. More recently, with the U.S. Consumer Price Index at a 39year high, it became clear the Fed was “behind the curve” and needed to accelerate the schedule for raising interest rates. As described above, this disproportionately affected investors’ views regarding the cash flows of growthoriented companies.

Wasatch Positioning

At Wasatch, we’re definitely growth investors and our approach was certainly out of favor in January. Nevertheless, we feel relatively wellpositioned for several reasons.

First, it’s not clear that inflation will continue to accelerate. Supplychain conditions are improving. Additionally, although the Fed and other central banks around the world will probably be on a tightening path for several years, this path is starting from a very low base. And even with interestrate increases, monetary policy isn’t likely to look extreme by historical standards. Moreover, highquality small caps have typically performed well in a modestly rising rate environment.

Second, we tend to invest in profitable companies that are largely able to selffund their longterm growth. As a result, our companies should be somewhat less vulnerable than unprofitable companies whose cash flows are more heavily weighted in the future. Unprofitable companies are also more likely to be forced to raise capital on disadvantageous terms.

Third, we’re diversified among sectors and industries. We own a balance of companies that provide a good combination of exposures to domestic businesses, global businesses and different viewpoints on the best way to manage Covid19 in terms of lockdowns and reopenings. Our goal is to stay invested in a mix of companies that can either benefit from greater economic reopenings or, alternatively, survive and prosper in anticipation of more Covid19 challenges. We believe this diversified and balanced approach will help mitigate excessive volatility and deliver longterm value for clients and shareholders.

Fourth, although many of our strategies and funds have underperformed their benchmarks recently, over longer periods they’ve generally outperformed. Moreover, the outperformance has overwhelmingly come from stock selectionsrather than from allocations to strong sectors, industries, etc. And we believe stockselection effects are more repeatable than allocation effects.

Frequency of Large Deviations From Benchmark Returns

In the past few years, our strategies and funds have deviated by a significant margin (positively and negatively) more often than we’d normally expect. But over the long term, we’ve shown an ability to perform wellwithout frequent extreme deviation from our benchmarks in the short term. In this regard, please refer to the table above.

What you see in the table is that for the 10 years through January 31, 2022, the Wasatch Core Growth Fund deviated from its benchmark by more than two percentage points in 28 out of 120 months. The 28 months represented a frequency of only 23%. The frequency was 28% for the Wasatch Global Opportunities Fund and only a bit higher at 33% for the Wasatch International Growth Fund and the Wasatch Emerging Markets Small Cap Fund.

What We Look for in Companies

In general, we seek highquality businesses with unique products and services, market leadership, pricing power, significant margins and operations that aren’t overly capitalintensive. Such businesses are typically better able to manage supply chains and cope with rising costs of labor and materials. Moreover, these businesses are usually less vulnerable to a revenue disruption because they tend to have healthy balance sheets with relatively low debt levels.

Regarding our specific holdings, we think we’re reasonably wellpositionedin areas like industrials, consumer names and financialsif businesses surprise investors to the upside. Alternatively, if conditions deteriorate for a period of time, we’d expect to benefit on a relative basis from our holdings in secular growers like noncapitalintensive informationtechnology companies involved in the digital transformation of societies around the world. While we’re still waiting for fourthquarter earnings to be reported, our companies haven’t made any meaningfully negative preannouncements, which often occur during major market selloffs. Our expectation is for our companies to grow their quarterly revenues by an average of greater than 20% yearoveryear.

As bottomup, fundamental investors, we’ll continue to pay strict attention to incomestatement metrics while we try to capture doubledigit earnings growth at rational prices. And if we stay focused on our investment principles, we believe stock performance will take care of itself over the long term. When picking companies, we won’t pay much attention to index performance and trends like growth versus value cycles. As our companies are tested by market forces, we’ll attempt to determine if stock prices appropriately reflect successes and failuresand whether those successes and failures are transitory or longlasting. In turn, we’ll adjust our portfolios as conditions unfoldrather than attempt to forecast macro events, which we see as more useful in writing newspaper headlines than in making investment decisions.

Thank you for the opportunity to manage your assets.


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 returns 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. Core Growth Fund—Total Expense Ratio: Investor Class—1.17% / Institutional Class—1.05%. Global Opportunities Fund—Total Expense Ratio: Investor Class—1.46% / Institutional Class—Gross: 1.40%, Net: 1.35%. International Growth Fund—Total Expense Ratio: Investor Class—1.41% / Institutional Class—1.32%. Emerging Markets Small Cap Fund—Total Expense Ratio: Investor Class—1.88% / Institutional Class—1.76%.

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 Core Growth Fund to 1.50% for the Investor Class and 1.05% for the Institutional Class, of the Global Opportunities Fund and International Growth Fund to 1.75% for the Investor Class and 1.35% for the Institutional Class, and of the Emerging Markets Small Cap Fund to 1.95% for the Investor Class and 1.80% for the Institutional Class through at least 1/31/2023. See the prospectus for additional information regarding Fund expenses.

Wasatch Funds will deduct a 2.00% redemption 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.

Performance for the Institutional Class of the Core Growth Fund prior to 1/31/2012 is based on the performance of the Investor Class. Performance of the Institutional Class prior to 1/31/2012 uses the actual expenses of the Investor Class of the Core Growth Fund without any adjustments. Performance for the Institutional Class of the Global Opportunities Fund, International Growth Fund and Emerging Markets Small Cap Fund prior to 2/1/2016 is based on the performance of the Investor Class. Performance of the Institutional Class prior to 2/1/2016 uses the actual expenses of the Investor Class of the Global Opportunities Fund, International Growth Fund and Emerging Markets Small Cap Fund without any adjustments. For any such period of time, the performance of the Institutional Class would have been substantially similar to, yet higher than, the performance of the Investor Class, because the shares of both classes are invested in the same portfolio of securities, but the classes bear different expenses.


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. Investing in foreign securities, especially in emerging and frontier markets, entails special risks, such as currency fluctuations and political uncertainties, which are described in more detail in the prospectus. Investments in emerging markets are subject to the same risks as other foreign securities and may be subject to greater risks than investments in foreign countries with more established economies and securities markets.

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 800.551.1700. Please read the prospectus carefully before investing.

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.

Wasatch Advisors, Inc., trading as Wasatch Global Investors ARBN 605 031 909, is regulated by the U.S. Securities and Exchange Commission under U.S. laws which differ from Australian laws. Wasatch Global Investors is exempt from the requirement to hold an Australian financial services licence in accordance with class order 03/1100 in respect of the provision of financial services to wholesale clients in Australia.

The Wasatch Core Growth Fund’s primary investment objective is long-term growth of capital. Income is a secondary objective, but only when consistent with long-term growth of capital.

The investment objective for the Wasatch Emerging Markets Small Cap Fund, Wasatch Global Opportunities Fund and Wasatch International Growth Fund is long-term growth of capital.

Wasatch Advisors, Inc., doing business as Wasatch Global Investors, is the investment advisor to Wasatch Funds.

Wasatch Funds are distributed by ALPS Distributors, Inc. (ADI). ADI is not affiliated with Wasatch Global Investors.


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.

Wasatch strategies and funds have been developed solely by Wasatch Global Investors. Wasatch strategies and funds are 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 indexes vest in the relevant LSE Group company, which owns these indexes. Russell® is a trademark of the relevant LSE Group company and is used by any other LSE Group company under license.

These indexes are 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 these indexes or (b) investment in or operation of the Wasatch strategies and funds or the suitability of these indexes for the purpose to which they are being put by Wasatch Global Investors.

The MSCI AC (All Country) 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 AC (All Country) World 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. This index is a free float adjusted market capitalization index designed to measure the performance of small capitalization securities.

The MSCI Emerging Markets Small Cap Index includes small-cap representation across 25 emerging-market countries. The index covers approximately 14% of the free float adjusted market capitalization in each country. The small-cap segment tends to capture more local economic and sector characteristics relative to larger emerging markets capitalization segments.

You cannot invest directly 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. (

Diversification does not eliminate the risk of experiencing investment losses.

Earnings growth is a measure of growth in a company’s net income over a specific period, often one year.

The U.S. Consumer Price Index (CPI), also called the cost-of-living index, is an inflationary indicator that measures the change in the cost of a fixed basket of products and services, including housing, electricity, food, and transportation. The CPI is published monthly. The headline CPI includes volatile food and energy prices, while the core CPI excludes food and energy.

Sales growth is the increase in sales over a specified period of time, not necessarily one year.

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