Wasatch Emerging Markets Small Cap Goes Its Own Way

This emerging-markets stock fund isn't afraid to stray from the pack.

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(Image credit: Getty Images)

The MSCI Emerging Markets index includes 27 countries and more than 1,400 stocks – a broad assortment, to be sure. Finding the most promising investments among those stocks and thousands of other candidates can't be easy. But the four managers at Wasatch Emerging Markets Small Cap (WAEMX) have a disciplined approach.

They start with a quantitative screen that "tees up good ideas," says Ajay Krishnan, a comanager. The screen helps them zero in on high-quality companies with healthy profits (measured by return on capital) and cash flow. Then they research each prospective firm from bottom to top and top to bottom.

The process results in a portfolio of roughly 50 to 80 stocks. It's a diversified list, but in some ways not as diversified as other emerging-markets stock funds. Not every sector finds a place in Emerging Markets Small Cap, for instance. The profitability screen makes sure of that. And only nine emerging-markets countries are represented.

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That's because the managers invest where their research takes them, even if it strays from what other emerging-markets funds are doing. India stocks make up 34% of the portfolio, three times the average exposure of peer funds. And Chinese companies – the top country in most emerging-markets stock funds – account for just 5% of Emerging Markets Small Cap's assets. "India's firms have been focused on profits," says Krishnan, while Chinese companies have been more focused on being "the biggest and the baddest."

The fund's hefty tilt toward India has been a plus. Over the past 12 months, the MSCI India index climbed 49%. But Chinese stocks declined 16%, amid a crackdown on some of its big tech firms. "The best way to invest in China is to focus on small companies," says Krishnan. "Stay under the radar, but buy good businesses." Among the fund's biggest winners over the past year are MindTree, an Indian tech consulting firm (up 253%), and Momo.com, a Taiwan-based social networking and messaging app firm (up 224%).

Over the past three years, the fund's 47.9% annualized return beat 99% of its peers. The trade-off was slightly higher volatility than its peers.

emerging markets stock funds table

Nellie S. Huang
Senior Associate Editor, Kiplinger's Personal Finance

Nellie joined Kiplinger in August 2011 after a seven-year stint in Hong Kong. There, she worked for the Wall Street Journal Asia, where as lifestyle editor, she launched and edited Scene Asia, an online guide to food, wine, entertainment and the arts in Asia. Prior to that, she was an editor at Weekend Journal, the Friday lifestyle section of the Wall Street Journal Asia. Kiplinger isn't Nellie's first foray into personal finance: She has also worked at SmartMoney (rising from fact-checker to senior writer), and she was a senior editor at Money.