Wasatch Wins With Small Overseas Companies

International Growth has performed well with emerging-markets stocks.

If you want a fund that owns well-known foreign companies, such as Nestlé or Toyota, don’t buy Wasatch International Growth (symbol WAIGX (opens in new tab)). Like most of Salt Lake City -- based Wasatch’s offerings, International Growth focuses on small, fast-growing companies. It holds such obscurities as Abcam, a British biotech firm; Campbell Brothers, an Australian chemical maker; and Semen Gresik, an Indonesian cement company.

Although the fund, run by Roger Edgley since 2006, is off to a rough start so far in 2011 -- losing 3.6 % through February 4 -- it performed well over the past year. Over that period, International Growth returned 34.4%. That beat its peer group -- funds that invest in fast-growing small and midsize firms -- by four percentage points. Over the past five years the fund returned an annualized 5.0%, topping the typical fund in its category by an average of 0.9 percentage point per year.

Compared with its rivals, International Growth tilts more toward emerging-markets stocks. At last report, 34% of its assets were in Indian, Brazilian, Indonesian and Chinese firms; at 12% of assets, India was the largest country weighting.

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But Edgley doesn’t pick firms based on the strength of individual countries; instead he focuses on picking individual stocks. Edgley and his team pride themselves on identifying investment opportunities before others. The managers look for firms with strong balance sheets and consistent profitability. They also examine past and projected sales and earnings growth. Then they compare growth expectations with the current share price to see whether a stock offers good value for the fund’s buck.

Although the fund holds more emerging-markets stocks than most of its competitors, Edgley says developing markets don’t offer as much value as they did two years ago. So over the next couple of years, he says, investors in both emerging and developed markets will rise or fall based on their ability to identify the companies that deliver the best earnings growth.

Specifically, Edgley says he’s having trouble finding quality companies in China. “You see a lot of companies with so-so valuations, but many of them are struggling to compete and they’re not producing a lot of cash,” he says. For Edgley, resource-rich Brazil offers a more enticing alternative. Its economy is strong, but he says far fewer companies are going public there than in China. “Brazil is a $1.5-trillion economy, but there aren’t many vehicles an investor can use to capitalize on rising spending by Brazilian consumers,” says Edgley. “In China there are hundreds of companies, but in Brazil there are tens.”

In Asia, the manager also likes Indonesia and Thailand, but he continues to underweight Japan because of that nation’s slow growth and deflation. Edgley also finds Canada attractive. Because its banking system has been well regulated, the subprime-mortgage crisis didn’t hurt Canada as much as it did the U.S. and Europe. Canada, which is resource-rich, has also benefited from the run-up in commodity prices since the global recession ended in 2009.

Among stocks Edgley currently finds attractive are Cetip, a Brazilian financial-services firm; Swedish cosmetics maker Oriflame; Canadian mortgage lender Home Capital Group; and Rotork, an industrial company in the United Kingdom. Not a single household name among them.

Jennifer Schonberger
Staff Writer, Kiplinger's Personal Finance