Q:  How was the fund conceived? A : Through our travels in emerging countries as part of our research for the Wasatch international funds, we found the small cap companies in emerging countries to be a noticeably under-covered and underfollowed asset class. In addition, they were best poised to capture the longer-term prosperity of these countries because they had greater exposure to the domestic demand-oriented sectors than the emerging market large caps which tend to have a more global bent. We launched the Emerging Markets Small Cap Fund to help investors directly access the most interesting part of the emerging market growth story—small cap stocks. We believed that we could apply the proprietary Wasatch small cap investment process very successfully in these markets. Q:  What is the investment philosophy behind the fund? A : We look for high quality sustainable growth companies, simple business models with competitive advantages that have strong balance sheets and/or cash flow statements to finance business growth. Our core belief is that small companies can grow faster than large ones. To this end, we find small undiscovered emerging market companies with excellent earnings growth potential and attractive valuations. Q:  How is your fund different from the index? A : The companies in our fund have much higher return on equity and return on assets, higher margins, and lower debt when compared to the financial position of the companies in the MSCI Emerging Markets Small Cap Index. These companies can self-fund their growth, whereas companies in the benchmarks do not generate adequate returns on equity to fund the growth. A lot of companies in the indices will probably need to raise capital to meet their growth targets which will dilute investor returns. Q:  What is the investment strategy that you apply? A : The fund invests primarily in small emerging market companies with market caps under $3 billion. This is pretty unique, as we are the only actively managed no-load emerging markets fund focused on small caps. There are over 6,000 emerging market small cap stocks. Our strategy is to travel the globe to find lesser known companies with good business models and nice tailwinds to drive strong growth over the next 3-5 years. As we analyze these smaller companies we focus on their potential for significant and sustained revenue and earnings growth and an experienced and proven management team. We use a thorough process and collaborative team to truly understand the companies in which we invest. We study the company, its competitors, and its industry. We talk with company management and others in the industry to gain deeper insight for the company’s management, prospects and risks. We consider a variety of valuation metrics to assess the potential return and the risk/reward trade-off of each stock. Valuation is an important component of every investment decision that we make. Q:  Would you outline your investment process? A : We use a bottom-up process of fundamental analysis to find the best small growth companies within emerging markets, specifically high-quality companies with strong financials and a sustainable competitive advantage. We start with a proprietary screen, an enhanced DuPont analysis that includes financial data of each company over the past ten years. We look at the cash flow, balance sheet and income statement history of every company in our universe at least twice a year looking for key metrics and trends that signal a strong company worthy of future exploration. We also have a separate screen looking at the financial data of all initial public offerings in these markets. After interesting companies have been identified through these screens, we hit the road, talk to management, and dig deep to understand their business and competitive position. On a number of occasions we have actually heard from management that we were the only analysts to visit the company this year. After much due diligence we purchase the stocks of high quality companies that the team believes are attractively priced relative to their expected 3-5 year growth. Q:  Would you illustrate your investment process with a couple of examples? A : One of the best examples that illustrate our research process comes from Indonesia’s cement sector, which is an oligopoly industry with three players that dominate the market. PT Semen Gresik Persero Tbk, an Indonesia-based cement company, is one of our current holdings. We found this company in great financial position, holding a strong brand name, and playing in a critical domestic infrastructure industry. The company initially attracted our attention through our screen because it had fairly stable and accelerating growth coming out of the Asian crisis. Moreover, they were building net cash on their balance sheet, had high returns on assets and equity, and were generating nice free cash flow. After conducting hands on research we became convinced that the company was in a strong position to grow and that the stock was significantly undervalued. Another example would be Cia Hering, a Brazilian textile-clothing company with a very powerful brand and a long history. Historically, the company has been a manufacturer but as of late has been opening retail stores. At the time when we began considering the name, they had very low liquidity and no sell-side analyst coverage. After speaking to management we found the company to be going from being a net debt company to a net cash company where it no longer needed funding from banks. The returns on capital were improving, growth was accelerating, and there was increasing confidence in the Brazilian retail environment. The key to their success is that the company has transformed itself from a T-shirt manufacturer to one of Brazil’s biggest apparel retailers with the iconic Hering brand. Q:  How do you build your portfolio? A : The portfolio has around 150 names with broad country and sector exposure. We are bottom-up stock pickers, but we stay aware of our sector and country weights so that we understand the risks in the portfolio. With regard to position size, our largest positions are typically in the 2-3% range. They are not our highest expected return companies; instead they are our highest quality companies in which we have the most confidence. We will take smaller positions in companies that are growing very quickly or have other inherent risks. The benchmark that we use is the MSCI Emerging Markets Small Cap Index. Of the companies in the index the average company is 45% owned by insiders or family members. This is another reason small cap stocks in these markets are particularly interesting. Our fund turnover has been around 25%, as it is our intention to buy and hold quality growth companies. Q:  How do you mitigate risk? A : First and foremost, we attempt to mitigate risk by investing in what we consider to be the highest-quality companies. We also limit individual position sizes and maintain portfolio diversity by country and sector to minimize pockets of risk.