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| Quarter | Letter Date | Fund Name | QTD | YTD | Tickers | Themes | Quick Take |
|---|---|---|---|---|---|---|---|
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"Constructive on high-quality international small caps as valuation spreads compress, deploying capital into durable compounders in Japan including Sanrio, Milbon, and Japan Elevator Service while divesting challenged consumer franchises."
Harding Loevner International Small Companies Equity generated a net return of 3.75% for the third quarter of 2026, outperforming the MSCI All Country World ex US Small Cap Index benchmark return of 2.19%. Year-to-date, the strategy has gained 9.34% net of fees compared to 11.78% for the benchmark index. Performance during the period benefited from strong stock selection across Europe, particularly within the Information Technology sector as software and IT services rebounded, as well as an intentional non-investment stance toward the declining Real Estate sector. Sector positioning remains anchored by overweights in Information Technology (22.9% vs. 14.5% benchmark), Industrials (21.5% vs. 20.5%), and Health Care (10.5% vs. 6.2%), offset by an underweight in Materials and zero exposure to Real Estate, while cash was held at 2.6%. The global macroeconomic environment was characterized by a sharp divergence between bond and equity markets. Long-term US Treasury yields surged above 5% driven by persistent inflation, resilient employment, and heavy capital expenditures on artificial intelligence infrastructure, compounded by sovereign fiscal deficits. In contrast, international equity markets exhibited buoyant optimism, with valuation spreads between high-quality growth businesses and highly cyclical, leveraged companies narrowing to some of the tightest levels seen in nearly thirty years. Geopolitical tensions in the Persian Gulf also lifted crude oil prices above $100 per barrel, fueling strong returns across energy and commodities, while rising interest rates bolstered banking shares. Portfolio activity centered on capitalizing on depressed quality-growth valuations, particularly in Japan following research trips. The fund initiated new long positions in character intellectual property owner Sanrio and professional hair-care products maker Milbon, while scaling up its holding in Japan Elevator Service to capture independent modernization demand. Additional portfolio purchases included Alten, Clicks Group, Curves, Equity Group, Hongfa, Mader, and Shuanghuan Driveline. Conversely, the manager completely exited seasoning manufacturer Ariake due to deteriorating volume growth in China and pricing resistance among Japanese ramen restaurants, alongside exits in Artea Bankas, Rathbones, Romgaz, SH Kelkar, Solasto, Square Pharmaceuticals, Sysmex, Wilcon Depot, and Yantai China Pet Foods.
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