In the second quarter, the International Opportunity fund continued its year-to-date outperformance, achieving a return of +7.72% (institutional share class). This stands in stark contrast to the MSCI All Country World ex USA Small Cap Index, which posted a modest gain of +0.85%. Effective stock selection has been crucial to our relative return profile, significantly benefiting our performance. In the last quarter, stock selection contributed +580 basis points (bps) to our excess returns. Over the past 12 months, the fund has generated an impressive +1,316 basis points from stock selection. Our sector performance was led in particular by information technology (+472 bps) and industrials (+257 bps), with materials (+22 bps) contributing modestly for the quarter. The remaining sectors were mostly neutral over the period, with detractors having relatively minor impact, including, health care (-41 bps), real estate (-63 bps), and financials (-33 bps).

This quarter, high-quality companies listed overseas have not only presented compelling investment opportunities, but have also been trading at a notable discount compared to their U.S. counterparts. We view this disparity as largely unwarranted when considering the macro and microeconomic shifts underway globally. The trend toward the normalization of interest rates has created a favorable environment for equities, particularly within international small-cap markets. Furthermore, the shift away from stringent fiscal policies has provided a supportive backdrop for additional growth and investment.

In Europe, economic sentiment and manufacturing activity have shown significant improvement, which is expected to translate into stronger earnings and overall performance for European equities. In Japan, we continue to see corporate governance reforms poised to drive multiple expansion, signaling potential for sustained future growth. We believe the currency drag appears to have subsided, although it’s expected to provide a limited boost to U.S. dollar-based returns.

Shifting to emerging markets, Chinese equities are attractively valued, supported by improved economic momentum and increased fiscal policy easing. However, a substantial recovery in domestic demand is needed for a long-term breakout. Despite our persistent cautious stance on Chinese equities, the country remains a significant growth catalyst for both emerging and developed markets. Other emerging markets in Asia, such as Korea and Taiwan, continue to benefit from a revival in the electronics cycle and an AI-driven boost in semiconductors. This quarter, we experienced a brief but sharp reminder of the impact elections can have on international markets. India, in particular, witnessed extreme volatility but is now anticipated to regain strength post-election, bolstered by strong economic momentum and earnings growth.

While we construct our portfolio on a bottom-up basis, overarching trends will sometimes standout as particularly additive over a specific period. Firstly, our discussions with management teams worldwide reveal a resilient consumer, despite conflicting headlines. Total spending on a global basis has held mostly steady in the second quarter, and our conversations with stakeholder’s signal even better demand than economic data suggests. Additionally, the small cap initial public market (“IPO”) market outside the U.S. has remained robust, with the International Opportunity fund participating in five IPOs on a year-to-date basis. This activity benefits our investors in several ways. These businesses not only fit our investment criteria and align with tailwinds we observe through our global lens, but our firm’s size allows us to secure preferable allocations. This enables us to participate effectively despite high market demand and the small initial offering sizes of these newly listed businesses.

Since the Fund’s inception nearly three years ago, we have had many conversations with both current investors in our domestic portfolio’s and new investor alike. Consistently, they have asked about our ability to achieve our outcomes by simply leveraging our existing team and research.

At the core, our early success can be attributed to our investment philosophy, which is designed to exploit sell-side inefficiency, and coincidently is amplified beyond U.S. borders. Similarly, the depth of industry knowledge possessed by the investment team and our unique insights gained from over 20 years of investing in small-cap companies, drives our unique perspective on the international landscape. Lastly, this lens significantly narrows the investible universe, allowing us to efficiently identify companies that display the same characteristics and tailwinds we value domestically. The additional research into these international businesses has not only driven favorable outcomes but also enriches our global industry knowledge, which in turn, benefits our U.S. portfolios.

The current investment landscape presents numerous opportunities driven by favorable economic shifts and resilient market conditions. Our opportunistic approach and deep industry expertise continue to position us well to capitalize the inherent inefficiencies within the international small and mid-cap spaces, while delivering strong performance for our investors over the first half of 2024. As always, we greatly appreciate the interest and support of our investors as we strive to deliver consistent and reliable results in this highly inefficient market segment.

 

Rohan Kumar, Lance Cannon, Brian Smoluch & David Swank

International Opportunity Fund Performance as of 6/30/24	YTD	1 Year	Since Inception
HR International Opportunity Fund (Inst)	15.90%	26.73%	5.18%
MSCI All Country World ex US Small Cap Index	2.67%	11.26%	-1.58%
Institutional Share Class inception date: 9/28/21

Performance quoted represents past performance for the Fund’s institutional class shares and there is no guarantee of future results.  The investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than the original cost.  Current performance may be higher or lower than the performance data quoted above.   Please call 800-497-2960 to obtain current and the most recent month-end performance data.  The gross expense ratio:  15.80%; net expense ratio (contractual through 10/31/24): 1.25%.