International Opportunity Fund Commentary – Q3 2024
In the third quarter of 2024, international equity markets were influenced by a combination of global economic recovery and regional variations. On one hand, stabilization efforts in major economies helped ease inflationary pressures, but the global picture remained mixed due to the differing trajectories of economic regions. Within the U.S. we witnessed the Federal Reserve cut interest rates, after an aggressive tightening cycle, as data showed slowing inflation and a softening domestic labor market. This sent ripples across international and emerging markets as lower rates within the U.S. will typically weaken the dollar, increase risk appetite and encourage capital flows into these regions.
While the institutional share class of the fund lagged behind the MSCI ACWI ex US Small Cap index by -713 basis points (bps) in the third quarter, the bigger picture remains bright, with a strong +602 bps lead year-to-date (YTD). Despite the headwinds this quarter, particularly due to allocation effect, our YTD performance highlights the strength of our approach: stock selection. Stock selection, through 2024, has been pivotal to our excess return profile —contributing over +758 bps relative to the index.
Although sector weights had an outsized negative impact on relative results, we view these as temporary headwinds. Our relative allocations are organic and a product of our bottom-approach. Regardless, we maintain an optimistic view on the earnings trajectories of our individual exposures in key areas like IT and energy. Despite the challenges, consumer discretionary (+9bps), utilities (+5bps), and materials (+5 bps) provided some positive contributions this quarter, helping to offset some of the losses from underperforming sectors such as industrials (-219bps), information technology (-145 bps), and real estate (-72 bps).
From a geographical standpoint, European equities gained some ground in third quarter, as industrial production picked up and inflation started aligning more closely with the European Central Bank’s targets. While political uncertainty, especially in France, triggered short-term market volatility, the overall outlook for many countries in the region remains favorable. The UK, in particular, has shown signs of sustained economic improvement, with both consumer and business confidence rising. The housing market has also started to rebound. Although inflation is on a downward trend similar to that in the eurozone and U.S., the Bank of England’s cautious approach suggests that rate cuts will come more slowly compared to other central banks.
Meanwhile, in China, the government took steps to stabilize the economy, focusing on boosting high-end manufacturing and consumption. While investors remained cautious, the stabilization in key sectors, especially manufacturing, provided a glimmer of hope for a gradual recovery.
One of the bigger challenges in the third quarter came in late July, when volatility spiked due to the unwinding of the Japanese carry trade. This was driven by two main factors: the Bank of Japan’s unexpected rate hike, which caused a repricing of Japanese bond yields, and a weaker U.S. jobs report, which lowered U.S. bond yields. These events caused Japanese stocks to plummet, with the Tokyo Stock Price Index dropping 20% over three days in early August. In response, we reduced our exposure to Japanese equities, anticipating short-term challenges for exporters due to the stronger yen. Despite this, we remain optimistic about Japan’s long-term outlook, particularly the benefits from ongoing corporate reforms and a focus on boosting shareholder returns.
On the tech front, AI-related investments had a mixed quarter. Earlier in the year, stocks tied to AI, especially in hardware and semiconductors, saw huge gains driven by the growing demand for AI infrastructure. This growth was fueled by advances in generative AI models, which require massive computing power, creating opportunities across various sectors. However, these stocks saw some cooling compared to broader international markets in the third quarter.
Even with some macroeconomic challenges surfacing this quarter, our bottom-up approach has led to some exciting discoveries across different sectors. One opportunity that’s gained prominence in the fund is Genius Sports. This is a perfect example of how our U.S. research can spark international ideas—this one came to light through discussions with U.S.-based, Draft Kings.
Genius Sports is a global player in sports data and technology, working with sports organizations, leagues, and betting operators. They specialize in gathering and distributing real-time sports data, like live game stats, which are crucial for sportsbooks, broadcasters, and media platforms. Their exclusive partnerships with top leagues such as the NFL, NBA, English Premier League, and others allow them to support the collection of data used to drive real-time odds and analytics. Genius is poised to benefit immensely as they possess world class technology, placing them at the epicenter of an industry that is undergoing rapid structural growth.
As we celebrate the fund’s three-year anniversary, we are proud to have achieved top-percentile performance in the Morningstar Foreign Small/Mid Cap Growth universe. The fund ranks 8 out of 128 funds over the 1-year annualized period, and 1 out of 121 funds over our first 3-year annualized period as of 9/30/24, based on risk adjusted returns. This quarter brought divergent paths across regions, with some economies showing strength while others, like China, are still in recovery mode. While the third quarter presented its challenges, we remain optimistic about the broader market environment and our ability as stock pickers to navigate it.
The current landscape offers significant opportunities, especially from an earnings perspective, where inefficiencies can be more pronounced internationally. Our bottom-up investment approach allows us to identify high-quality companies with strong growth potential, even amidst economic fluctuations. As markets evolve, our disciplined strategy positions us well to exploit these inefficiencies and uncover what we believe are the best ideas.
We appreciate the support of our investors, and look forward to reconnecting at the end of the year to recap our progress.
Rohan Kumar, Lance Cannon, Brian Smoluch & David Swank
International Opportunity Fund Performance as of 9/30/24 |
YTD |
1 Year |
3 Year |
Since Inception |
HR International Opportunity Fund (Inst) |
17.95% |
31.15% |
5.36% |
5.35% |
MSCI All Country World ex US Small Cap Index |
11.93% |
23.25% |
1.39% |
1.22% |
Institutional Share Class inception date: 9/28/21 |
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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%.
Investment Considerations:
All investing includes risk, including the loss of principal. The Fund invests in small-cap securities which present a greater risk of loss than large-cap securities, and in growth companies which can be more sensitive to the company’s earnings and more volatile than the stock market in general. The Fund also invests in foreign securities which are subject to risks including currency fluctuations, economic and political change and differing accounting standards. The Fund may invest in derivatives and IPOs, which are highly volatile. Additional risk information may be found in the prospectus.
*All information in this report is as of June 30, 2024 unless otherwise indicated. The benchmark is the MSCI ACWI ex US Small-Cap Index, defined as a stock market index comprising of non-U.S. stocks from 22 of 23 developed markets and 26 emerging markets. The MSCI ACWI Ex-U.S. index is made up of 2,361 constituents, which is 85% of the global equity market aside from the U.S. Investors cannot directly invest in an index.
Past performance is no guarantee of future results. Rankings are the fund’s total return-percentile rank relative to all funds that have the same category for the same time period. The highest (or most favorable) percentile rank is 1, and the lowest (or least favorable percentile rank is 100. The top-performing fund in a category will always receive a rank of 1.
2024 Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. The Fund does not pay Morningstar for ratings or rankings but does pay a licensing fee for the use of this data.
Investors should carefully consider the Fund’s investment objective, risks, charges, and expenses before investing. For a prospectus, which contains this and other important information about the Fund, please call 800-497-2960. Please read the prospectus carefully before investing or sending money.
The Hood River International Opportunity Fund is distributed by Quasar Distributors, LLC. Hood River Capital Management LLC serves as the advisor to the Hood River International Opportunity Fund.
NOT FDIC INSURED-NO BANK GUARANTEE-MAY LOSE VALUE