There are more small-cap stocks to choose from. The MSCI Emerging Markets Small Cap Index contains a universe of more than 1,800 companies, over twice the number in the MSCI Emerging Markets Index. Foreign small- and micro-cap companies represent 90% of public foreign companies.

Foreign micro caps and small caps have a lower correlation to U.S. stocks than foreign large caps.

Many of the stocks the Wasatch fund invests in are off the radar screens of most Wall Street analysts, so the fund's managers and analysts travel extensively to talk to companies' management to see what's going on firsthand. Assessing the inner workings of these businesses, many of which have high levels of family and insider ownership, isn't always easy.

"Sometimes the managers of our favorite high quality companies aren't motivated to see us because they already have enough capital," says Geritz. "But many of them are quite receptive." Many foreign companies also comply with international financial reporting standards, she adds.

Since it's one of the few actively managed small-cap emerging markets funds, Wasatch's managers take advantage of the broad discretion they have over country and sector allocations. For example, the fund has about 8.5% of its assets in China, less than half the weighting of the Vanguard Emerging Market ETF. Nearly one-quarter of the assets are invested in India, the second most populous country in the world. In the iShares Emerging Markets Index fund, that country accounts for only 6.5% of assets. About 60% of the Wasatch fund's assets are invested in Asia, 16% in the Middle East and Africa and 14% in Latin America.

To the managers, the difference in country allocations from popular large-cap-focused ETFs is more about the quality and growth potential of companies than a particular country's economic profile. "We want higher-quality companies that have the ability to grow solidly over the long-term, and the breadth and depth of the companies in India fits in with our style," says Geritz. "These aren't new businesses. A lot of them have been around for decades." Once the managers settle on a stock, they will usually hang on to it for several years, as evidenced by a 20% turnover rate.

They also consider each stock's potential against a backdrop of broad economic trends. "There is a point in a country's economic growth where consumer demand really begins to take off and per capita GDP explodes," says Edgley. "In China, that happened in 2001 and 2002. It's happening now in Indonesia. And in India, we expect that explosion in consumer demand to occur over the next three to five years."
Sector allocations also vary from those in popular large-cap emerging market indexes.

"GDP growth in emerging market countries ranges from about 4.5% to 9%," says Edgley. "But some sectors are growing at several times their country's overall growth rate." As an example, he cites Brazil's health-care industry, which is growing at two to three times the rate of the overall economy.

To capitalize on growing consumer demand in domestic markets, the fund has nearly one-quarter of its assets in consumer discretionary stocks, which is three times more than the allocation in the iShares ETF. Since emerging market consumers are only beginning to use credit, the potential upside for the sector is large, says Edgley. Other large sector weightings include financials at 21%, industrials at 15%, and materials at 12%.

Even in South Africa, where a government clampdown on lending in 2008 led to a deeper recession than other countries had, the groundwork for a bounce-back is being laid as financially sound consumer-oriented companies, such as fund holding Mr. Price Group, capitalize on a growing middle class. The company, which opened its first store in 1885, is the country's leading apparel retailer.