Harding Loevner Funds N-CSRSCertified semi-annual shareholder report (management investment company)

The market turmoil unleashed by theCOVID-19 pandemic has been nothing short of astonishing. Initial apprehension about the outbreak’s severity, spread, and persistence triggered a breathtaking dive in equity prices that was followed by an equally vertiginous rebound as global policymakers responded with unprecedented monetary and fiscal support. Preliminary estimates indicate that up to a third of global economic capacity may be lying fallow in the battle to combat the pandemic. Tentative forecasts project output declines that range from substantial to positively horrifying. With almost every country grappling with a collapse in output and employment of unknown duration, a cloud of uncertainty now hangs over global markets.

For investors, the pandemic and accompanying economic fallout are startling reminders of the notion of fundamental uncertainty, the collection of vague, indeterminate, and ever-present dangers that lurk just below the surface in every society. A reminder that a fair chunk of what passes for risk defies estimation and therefore cannot be reliablyre-engineered, packaged, and hedged away. Awake-up call that, despite mankind’s technological sophistication, foreknowledge of our fate will always remain just beyond our grasp.

Because humans are purposeful and pragmatic animals, we are inclined to dismiss the significance of wild uncertainty. Instead, we assume that the unknown is bounded and that the full range of possible outcomes is somehow under our control. It’s an unrealistic but practical assumption that speeds along decision-making by side-slipping the inevitable log jams thrown up by incessant ambiguity. To banish chaos and assert control, we adopt a hodgepodge of expedient habits so ingrained that we barely notice them. Taking history as our guide, we proceed as though tomorrow, in most respects, will resemble the recent past. We assume that the prices we observe, with a handful of piffling exceptions, reflect a correct summation of all relevant probabilities. And in the absence of confidence in our own views about the future, we look to others and mimic their behavior, knowing that, if we fail, we do so in good company. But this collection of soothing modalities is no more than a convenient fiction. Our willing suspension of disbelief should not fool us into thinking that uncertainty has been brought to heel. Human affairs forever remain at the mercy of unseen hopes and fears that can take charge at any moment.

purchases in exchange for some form of upfront relief. And anxious rivals are now eager to discuss the benefits of a strategictie-up. But make no mistake: this is about more than simply being able to consummate a merger on favorable terms. A judicious deployment of balance sheet strength can entrench a dominant position for the next cycle and in some cases even reshuffle the competitive landscape.

Financial engineering loses much of its appeal, and profitless growth is harder to justify, when investors are focused on resilience.

Over the medium term, the importance of sustainable growth will also be magnified in a world reeling from a colossal shock. Especially vulnerable, in our view, are the business models that stress short-term earnings targets, improbably large dividend payouts, and lavish spending on stock repurchases at the expense of productive investment. Financial engineering loses much of its appeal, and profitless growth is harder to justify, when investors are focused on resilience. Moreover, seismic shifts are often a powerful catalyst for new growth vectors, akin to the rapid growth you see in a forest after a wildfire. The adoption of new technologies and business models is pulled forward as consumers and businesses adapt to new consumption and work habits. Companies predisposed toward innovation will be best placed to evolve and reap the benefits.

In the very long term, our emphasis on management quality—shorthand for an essential combination of integrity and

PORTFOLIO MANAGEMENT TEAM

				PETER BAUGHAN, CFA CO-LEAD PORTFOLIO MANAGER   FERRILL ROLL, CFA CO-LEAD PORTFOLIO MANAGER   SCOTT CRAWSHAW PORTFOLIO MANAGER   JINGYI LI PORTFOLIO MANAGER   CHRISTOPHER MACK, CFA PORTFOLIO MANAGER   RICHARD SCHMIDT, CFA PORTFOLIO MANAGER

PERFORMANCE SUMMARY

For the Global Equity Portfolio, the Institutional Class declined 0.47%, the Institutional Class Z declined 0.43%, and the Advisor Class declined 0.55% (net of fees and expenses) in thesix-month period ended April 30, 2020. The Portfolio’s benchmark, the MSCI All Country World Index, declined 7.67% (net of source taxes).

MARKET REVIEW

Global stock markets fell in the six months ended April 30, as optimism resulting from theUS-China trade agreement at the end of 2019 was quickly overshadowed by the ongoingCOVID-19 outbreak. Nearly all sectors and regions finished in negative territory for the period.

The closing months of 2019 saw improving investor sentiment as the trade war between the US and China witnessed something of a détente, with the two parties agreeing to a limited pull-back from their entrenched positions. Inmid-December, days before new tariffs were to take effect, officials announced a “Phase One” trade agreement. The deal rolled back some US tariffs on Chinese goods while boosting Chinese purchases of US energy, manufactured goods, and agricultural products. The countries also agreed on enhanced protections for intellectual property. The developments bolstered investor sentiment toward China and Emerging Markets (EMs) generally; China’s GDP growth, which appeared to falter at the end of 2018, stabilized by the end of 2019.

Despite the rebound in equity markets, there were signs of fragility in financial markets as we entered 2020. The year began with the US killing of a top Iranian general, escalating tensions in the Middle East before investor attention was gripped by mushrooming

United States passed a US$2.2 trillion economic relief package, and European governments pledged hundreds of billions of euros to mitigate the sudden losses of personal and corporate incomes. Chinese officials committed to increase spending on infrastructure projects.

Amidst this fraught economic backdrop, Health Care outperformed, with strong relative performance in Pharmaceutical and Biotechnology stocks since drug sales are typically less sensitive in recessions and may even see an uplift in the event of new treatments forCOVID-19. Unexpectedly, Information Technology (IT), normally a cyclical sector, also outperformed in the decline, a topic we address later in Perspective and Outlook. Energy stocks performed the worst, falling in sympathy with the dramatic fall in oil prices. Real Estate and Financials also performed poorly, anticipating the overall decline in economic activity and likely increase in defaults.

Viewed by geography, Asian markets were among the most resilient. China performed the best of any major market despite being the locus of the outbreak, perhaps reflecting the success of domestic containment efforts once the virus had been identified. The US also outperformed, but that result is due more to the effect of falling currency exchange rates on theUSD-based returns of other markets than on the relative resilience of US versus international stocks. The large Health Care and IT sectors in the US were important contributors. Countries heavily reliant on commodities and energy, such as Australia, Canada, Russia, and Brazil, were some of the worst performers. Emerging Markets performed in line with developed markets, almost solely due to the strong relative performance of China.

PERFORMANCE ATTRIBUTION

The Portfolio’s outperformance derived from both positive sector allocation and stock selection. Our overweights in Health Care and IT helped, as did our underweights in Energy and Financials. Within Health Care,US-based biopharmaceutical holdingsRegeneron andVertex Pharmaceuticals along with Swiss contract

1. Reviewing all Portfolio holdings or followed companies for newly heightened risks to the investment thesis from the market environment, either in their business model or in their financial structure.

2. Deploying modest cash reserves into companies we strongly admire, but whose shares have seemed far too highly priced until now.

3. Examining our existing holdings for evidence of price dislocations, instances where share prices have either over or under reacted relative to our understanding of their longer-term prospects. Mispricing due to the short-term urgency of others’ behavior can offer rich opportunities for investors with a long-term investment horizon.

4. Divining in what ways companies and individuals may behave differently after the coronavirus is overcome (if they do.)

The stocks of high-quality, fast-growing companies have held their ground well in this market decline. The resilience of quality has come widely to be expected, leading us to fear that, because of the growth in their popularity, shares of high-quality companies might not be as stable in “the next downturn” as in prior episodes. That has not been the case in this one, so far. But the resilience ofgrowth stocks is one of the marvels of this decline. In the US (the stock market for which we have the longest data series), the IT sector, for example, has underperformed the S&P 500 in all but one bear market since 1926. As such, it is generally unheard of for IT to rival the performance of thenon-cyclical and traditionally “defensive” sectors of Consumer Staples or Utilities in down markets, yet it has done so this time. This anomaly makes perfect sense, however, considering how companies and individuals have responded to the pandemic in ways that accelerate the trends that were already fueling the growth of companies that exploit the internet as a mode of commerce.

GEOGRAPHIC EXPOSURE (%) at April 30, 2020

¹MSCI All Country World Index;²Includes countries with less-developed markets outside the Index.

take out the high-cost producers sooner rather than later. That is the rational explanation of what OPEC members have done by scotching their agreement. The pandemic has temporarily crushed demand just as supply discipline has been abrogated.

Looking forward, the questions for us have become: Will there be excess, or instead insufficient, supply to meet resumed demand on the far side of theCOVID-19 recession, given the closure of access to capital markets for a large swath of the high cost and debt-dependent producers in this combined oil price and high-yield swoon? How much exploration and production capital expenditure was being made, and how much will no longer get spent? We’re unsure, but this much is clear: the breakdown of theOPEC-led cartel has done more to raise the cost of capital for the Energy industry than all the Extinction Rebellion and 350.org protests combined. The question remains whether this higher cost of capital will deliver what the rarely considered logic demands: higher returns on capital for those who remain in the business.

Another marvel of this bear market has been the astonishing outperformance of Chinese shares, especially those traded primarily on the domestic Shanghai and Shenzhen exchanges, relative not only to the rest of Emerging Markets, but relative even to the US market. While there may be some effect from lower financialization (read: derivative engineering) in Chinese markets, the prohibition of short-selling, and maybe even some muscular jawboning by their regulators, we think China’sout-performance is for the most part based on solid grounds. Ultimately, China’s economy is likely to recover faster, and its political influence with other countries will expand, especially in those places that are benefiting from Chinese medical and technical aid.

PORTFOLIO HIGHLIGHTS

We ended the period overweight to Health Care, IT, Industrials, Communication Services, and Materials and underweight to Consumer Discretionary, Consumer Staples, Financials, and Energy. By continuing to add to our US holdings, we reached a slight overweight, thus ending a long-standing underweight to the US.

Health Care remains the Portfolio’s largest overweight, boosted by especially good performance from Vertex, Regeneron, and Lonza. While Vertex’s shares remain attractive in our view, we sold our Regeneron shares after their bigrun-up left their valuation extended.

Emblematic of our struggle to analyze the Energy sector is the poor performance of our longstanding shareholding inSchlumberger. While it remains a leading global provider of cutting-edge services for oil drilling, its profitability and balance sheet have been badly damaged by the plunge in oil prices. Exploration budgets, already diminished by years of low oil prices and now further reduced by weakened oil consumption from virus containment measures, will face additional cuts as Saudi Arabia and Russia increase production in an attempt to bankrupt US shale oil producers. In these conditions, we lost confidence in the adequacy of

PORTFOLIO MANAGEMENT TEAM

		FERRILL ROLL, CFA CO-LEAD PORTFOLIO MANAGER   ANDREW WEST, CFA CO-LEAD PORTFOLIO MANAGER   BRYAN LLOYD, CFA PORTFOLIO MANAGER   PATRICK TODD, CFA PORTFOLIO MANAGER

PERFORMANCE SUMMARY

For the International Equity Portfolio, the Institutional Class declined 9.35%, the Institutional Class Z declined 9.34%, and the Investor Class declined 9.50% (net of fees and expenses) in thesix-month period ended April 30, 2020. The Portfolio’s benchmark, the MSCI All Country Worldex-US Index, declined 13.22% (net of source taxes).

MARKET REVIEW

International stock markets fell in the six months ended 30 April, as optimism resulting from theUS-China trade agreement at the end of 2019 was quickly overshadowed by the ongoingCOVID-19 outbreak. Nearly all sectors and regions finished in negative territory for the period.

The closing months of 2019 saw the trade war between the US and China reach something of a détente, with the two parties agreeing to a limited pull-back from their entrenched positions. Inmid-December, days before new tariffs were to take effect, officials announced a “Phase One” trade agreement. The deal rolled back some US tariffs on Chinese goods while boosting Chinese purchases of US energy, manufactured goods, and agricultural products. The countries also agreed on enhanced protections for intellectual property. The developments bolstered investor sentiment toward China and Emerging Markets (EMs) generally; China’s GDP growth, which appeared to falter at the end of 2018, stabilized by the end of 2019.

requirements for both sovereign and corporate issuers. The People’s Bank of China cut its reserve requirement ratio—twice—hoping to spur bank lending. On the fiscal front, governments responded with massive spending plans, dwarfing the rescue programs from the global financial crisis. The United States passed a US$2.2 trillion economic relief package, and European governments pledged hundreds of billions of euros to mitigate the sudden losses of personal and corporate incomes. Chinese officials committed to increase spending on infrastructure projects.

Amid this fraught economic backdrop, Health Care performed best, with strong relative performance in Pharmaceutical and Biotechnology stocks since drug sales are typically less sensitive in recessions and may even see an uplift in the event of new treatments forCOVID-19. Unexpectedly, Information Technology (IT), normally a cyclical sector, also outperformed in the decline, a topic we address later in Perspective and Outlook. Energy stocks performed the worst, falling in sympathy with the dramatic fall in oil prices. Real Estate and Financials also performed poorly, anticipating the overall decline in economic activity and likely increase in defaults.

Viewed by geography, Asian markets were among the most resilient. China performed the best of any major market despite being the locus of the outbreak, perhaps reflecting the success of domestic containment efforts once the virus had been identified. Japan, Hong Kong, Taiwan, and New Zealand also held up better than most other markets. Countries heavily reliant on commodities and energy, such as Australia, Canada, Norway, Indonesia, Russia, and Brazil, performed the worst. Emerging Markets as a group performedin-line with developed markets, but almost solely due to China’s strong relative performance.

PERFORMANCE ATTRIBUTION

The Fund’s outperformance came partly from its overweight in IT, although our stocks didn’t keep up with the sector’s strong returns. Solid stocks in Industrials and Health Care offset the lagging stocks in IT and Energy.

2. Deploying modest cash reserves into companies we strongly admire, but whose shares have seemed far too highly priced until now.

3. Examining our existing holdings for evidence of price dislocations, instances where share prices have either over or under reacted relative to our understanding of their longer-term prospects. Mispricing due to the short-term urgency of others’ behavior can offer rich opportunities for investors with a long-term investment horizon.

4. Divining in what ways companies and individuals may behave differently after the coronavirus is overcome (if they do.)

The stocks of high-quality, fast-growing companies have held their ground well in this market decline. The resilience of quality has come widely to be expected, leading us to fear that, because of the growth in their popularity, shares of high-quality companies might not be as stable in “the next downturn” as in prior episodes. That has not been the case in this one, so far. But the resilience ofgrowth stocks is one of the marvels of this decline. In the US (the stock market for which we have the longest data series), the IT sector, for example, has underperformed the S&P 500 in all but one bear market since 1926. As such, it is generally unheard of for IT to rival the performance of thenon-cyclical and traditionally “defensive” sectors of Consumer Staples or Utilities in down markets, yet it has done so this time. This anomaly makes perfect sense, however, considering how companies and individuals have responded to the pandemic in ways that accelerate the trends that were already fueling the growth of companies that exploit the internet as a mode of commerce.

The most obvious of these trends is the increasing share of online spending at the expense ofbrick-and-mortar shops and malls.

GEOGRAPHIC EXPOSURE (%) at April 30, 2020

¹MSCI All Country Worldex-US Index;²Includes countries with less-developed markets outside the Index.³Includes companies classified in countries outside the Index.

reduced demand,low-cost producers will aim to make sure it’s not their reserves that are shut in. Better, therefore, to take out the high-cost producers sooner rather than later. That is the rational explanation of what OPEC members have done by scotching their agreement. The pandemic has temporarily crushed demand just as supply discipline has been abrogated.

Looking forward, the questions for us have become: Will there be excess, or instead insufficient, supply to meet resumed demand on the far side of theCOVID-19 recession, given the closure of access to capital markets for a large swath of the high cost and debt-dependent producers in this combined oil price and high-yield swoon? How much exploration and production capex was being made, and how much will no longer get spent? We’re unsure, but this much is clear: the breakdown of theOPEC-led cartel has done more to raise the cost of capital for the Energy industry than all the Extinction Rebellion and 350.org protests combined. The question remains whether this higher cost of capital will deliver what the rarely considered logic demands: higher returns on capital for those who remain in the business.

Another marvel of this bear market has been the astonishing outperformance of Chinese shares, especially those traded primarily on the domestic Shanghai and Shenzhen exchanges, relative not only to the rest of Emerging Markets, but relative even to the US market. While there may be some effect from lower financialization (read: derivative engineering) in Chinese markets, the prohibition of short-selling, and maybe even some muscular jawboning by their regulators, we think China’sout-performance is for the most part based on solid grounds. Ultimately, China’s economy is likely to recover faster, and its political influence with other countries may expand, especially in those places that are benefiting from Chinese medical and technical aid.

PORTFOLIO HIGHLIGHTS

Information Technology remains our largest sector weight, at roughly double the 10% weight in the index, a sector characterized by above average growth, profitability, and balance sheet strength, though we should note that our IT companies have varying exposures to economic cycles and trade, ranging from more economically sensitive chipmakers, to potentially less-sensitive software providers. We bought a new holding in payments processorAdyen, a company whose rapid growth owes to its newer payment platform, which gives it a technological edge over larger, more established competitors. By integrating global online andpoint-of-sale transaction processing, Adyen offers businesses superior analytical insights into their customers’ behavior. We expect it to continue gaining market share for years to come.

Consumer Staples holdings have grown to become our third-largest sector weight and, at nearlyone-sixth of the portfolio, its highest level in the past ten years. We wrote in our 1Q19 letter about our moves to increase our weight in Staples, seeking companies with steady growth potential coupled with less economically sensitive business models, while helping diversify our portfolio and moderate overall portfolio volatility. Global staples producers such as

PORTFOLIO MANAGEMENT

PERFORMANCE SUMMARY

For the International Small Companies Portfolio, the Institutional Class fell 10.57% and the Investor Class dropped 10.65% (net of fees and expenses) in thesix-month period ended April 30, 2020. The Portfolio’s benchmark, the MSCI All Country Worldex-US Small Cap Index, fell 15.05% (net of source taxes).

MARKET REVIEW

Stocks of international small companies rose at the end of 2019 amid easingUS-China trade tensions but fell sharply in the first four months of 2020 as theCOVID-19 pandemic engulfed the planet. The size and speed of equity market declines were unprecedented, with volatility reaching levels not seen since the global financial crisis. All regions finished thesix-month period ending April 30 in negative territory.

The New Year began with rising expectations for earnings growth amid Washington’s and Beijing’s “Phase One” trade agreement and central banks’ accommodative policies, but the optimism quickly evaporated in January as a new coronavirus claimed its first victims in China and spread from its origin in Wuhan to other parts of the country. Bymid-February, Chinese authorities locked down the entire province of Hubei, an area the size of Illinois but, at nearly 60 million people, four times its population. Within a month, the World Health Organization declared the outbreak a global pandemic. Although the respiratory disease spread first in Asia, the epicenter shifted rapidly to Europe and the US. By April 30, the infection had spread to over 180 countries, and governments everywhere were struggling to contain the disease and its fallout. The ensuing travel restrictions, business closures, and home confinements brought economic activity to a shuddering stop.

A severe global recession is now at hand. One data point from first-affected China—a 79% decline in nationwide auto sales in February—is a harbinger of the speed and depth of declines in

discretionary goods, is expected to remain stable in the face of consumers self-isolating. Information Technology (IT), normally a cyclical sector, outperformed in the decline, too. Energy stocks fell sharply in sympathy with the dramatic fall in oil prices. Industrials, Consumer Discretionary, and Financials performed poorly, anticipating the overall decline in economic activity and likely increase in defaults.

Viewed by region, the Middle East, Canada, and Japan performed best. EMs lagged developed markets, largely due to the region’s large number of countries reliant on commodities and energy. China proved to be one of the most resilient countries despite being the locus of the outbreak, perhaps reflecting the success of domestic containment efforts once the virus was identified.

PERFORMANCE ATTRIBUTION

By sector, our longstanding overweight to IT, specifically the Software and Services industry group, contributed most to our relative performance in the period. Shares ofKinaxis, a Canada-based provider of supply-chain management software, outperformed the market after the company announced in February that its cloud software order backlog had grown 40%year-on-year. The pandemic’s impact on supply chains has increased demand for Kinaxis’s core product. IT consulting and systems integratorBechtle also outperformed. In early February, the German company said its fourth-quarter revenue grew 18%, well above investors’ expectations and an acceleration from the year prior. Management also remained cautiously optimistic for 2020.

Poor selection in Industrials hurt our relative returns.Senior, aUK-based aerospace parts supplier that was already reeling from the grounding of Boeing’s737-MAX jetliner, is also now dealing with the effects of the pandemic. Demand for aircraft components has plummeted as people avoid air travel. Our weak stocks in Materials and Consumer Staples dented performance. In the latter sector, shares of natural flavoring supplier Ariake fell after the Japanese company reported disappointing earnings in late 2019. Growth in Ariake’s China business fell short of expectations.

Sometimes, when the storm is upon you, the least exciting aspect of your preparation reveals itself to be critical. We think the most immediately important preparation our approach provides is our insistence on financial strength. By not compromising on our commitment to strong balance sheets when times are good, we reduce losses arising from financial distress when the tide of easy credit and abundant demand inevitably recedes. We can therefore place greater confidence on our estimates of the long-term value of our companies, for if a company is to enjoy the growth in an economic recovery it must first survive the transient shock. Currently, the debt to equity ratio of our portfolio companies is meaningfully lower than that of the benchmark (21% vs 50%); this is but one of the dimensions of financial strength that we consider.

Sometimes, when the storm is upon you, the least exciting aspect of your preparation reveals itself to be critical.

In early 2020, small companies with the lowest debt burdens outperformed. We believe the market’s focus is correct, particularly for small caps, which can face more difficulty accessing credit than large companies in periods of distress. Because a company’s finances can change quickly, our analysts are evaluating the pandemic’s potential impact on their respective companies, scrutinizing them for new and newly heightened risks to their investment theses. So far, unsurprisingly, analysts are finding the impact varies markedly by sector.

As noted earlier, airplane parts supplier Senior is highly exposed to the aviation industry’s freefall. As of March 31, major airlines worldwide have slashed capacity by more than half, and the International Air Travel Association reported they might lose as much as US$252 billion in passenger revenue in 2020. The airlines are furiously cutting costs to survive, testing the financial strength of plane manufacturers Airbus and Boeing as well as their suppliers. We have reviewed Senior’s financial position with its management. The company’s net debt is manageable, and it has only £15 million

GEOGRAPHIC EXPOSURE (%) at April 30, 2020

¹MSCI All Country Worldex-US Small Cap Index;²Includes countries with less-developed markets outside the Index;³Includes companies classified in countries outside the Index.

Pharmaceutical, a Japanese small-format discount drug store that primarily sells food, cosmetics, andover-the-counter pharmaceuticals. In March, Cosmos reported its same-store sales grew 11% in February over last year, largely due to increased demand for face masks, cleaning products, and food. To the extent that stockpiling accounted for some portion of that growth, volume growth will inevitably slow, but the company’s strong net cash position will help it weather the crisis.

PORTFOLIO HIGHLIGHTS

We made only slight changes to the Portfolio in reaction to the spreading pandemic as we responded to shifting valuations and revisions to our outlook for companies. Our Portfolio’s sectoral profile was essentially unchanged: we retained our longstanding overweight to IT, Health Care, and Consumer Staples and underweight to Financials, Consumer Discretionary, and Real Estate.

We made only slight changes to the Portfolio in reaction to the spreading pandemic as we responded to shifting valuations and revisions to our outlook for companies.

Several transactions involved Consumer Staples, a sector that typically holds up better than others in troubled times. We favor small Staples companies that have a dominant market share (albeit in narrower niches than their larger counterparts), strong brands, financial strength, and capable management. A new holding, Egyptian snack producerEdita Food Industries, fits that mold. It has a dominant position in cakes and croissants. In late 2019, the company’s shares fell sharply after it encountered increased competition in cakes. We took advantage of the opportunity to establish a position at a reasonable price. Management has taken steps to address the challenge, including launching new products and ramping up its marketing, that we expect to bear fruit this year. We also added to our position inAlicorp, Peru’s dominant consumer packaged goods company. Alicorp continues to find growth by focusing its marketing efforts on product categories where it has lagged rivals. The company is also continuously repositioning its products to ensure they are competitive in value segments.

We sold two Staples companies in the first three months of the year. AlthoughNestlé Nigeria’ssales growth remains intact, our analyst detected a deterioration in working capital due to regulatory changes that require the company to make advanced payments to suppliers. The change alone is not a material concern given the company’s strong balance sheet. However, with the collapse in oil prices, Nestlé Nigeria’s exposure to US dollar-denominated debt, and the rising risk of a currency devaluation, we thought it prudent to exit the position and monitor developments from the sidelines. We also sold Kenya’sEast African Breweries due to increasing competitive pressure from a new entrant, Carlsberg.

PORTFOLIO MANAGEMENT TEAM

The Institutional Emerging Markets Portfolio (Institutional Class and Institutional Class Z) and the Emerging Markets Portfolio (Advisor Class)—collectively, the “Portfolios”—are both managed in strict accordance with Harding Loevner’s Emerging Markets Equity strategy model portfolio. Therefore, the Portfolios have highly similar holdings and characteristics. We have provided a single commentary to cover both Portfolios. The specific performance and characteristics of each are presented separately in the tables that follow.

PERFORMANCE SUMMARY

For the Institutional Emerging Markets Portfolio, Institutional Class fell 15.28% and Class Z fell 15.24% (net of fees and expenses). For the Emerging Markets Portfolio, the Advisor Class fell 15.55% (net of fees and expenses) in thesix-month period ended April 30, 2020. The Portfolios’ benchmark, the MSCI Emerging Markets Index, fell

10.50% (net of source taxes).

MARKET REVIEW

At the start of fiscal year, ade-escalation in theUS-China trade conflict, accommodative central bank policies, and easing fears of an imminent global recession were contributing to a generally bullish environment. Emerging markets (EMs) rose about 10% from the start of the fiscal year throughmid-January.

The market environment radically changed in the early months of 2020, however, as theCOVID-19 pandemic began to engulf the planet and oil prices collapsed amid a production dispute between Saudi Arabia and Russia. EM stocks plummeted over 30% betweenmid-January and the end of March, before regaining some ground in April. The size and speed of the equity market decline were unprecedented, with volatility reaching levels not seen since the 2008 global financial crisis.

The new coronavirus claimed its first victims in China in November, spreading from its origin in Wuhan to other parts of the country. Bymid-February, Chinese authorities locked down the entire province

China’s grim data points were a harbinger of the speed and depth of declines in economic activity to come in other countries. At the end of the period, most developing countries were also experiencing the full brunt of the widespread contagion that would come with community spread. Their economies also suffered secondary effects of the outbreak, including a global US dollar shortage and plummeting commodity prices. Exacerbating the economic turmoil, Saudi Arabia retaliated against Russia for its unwillingness to curb oil production and flooded the market with excess supplies of oil. A price war between two of the world’s biggest oil producers amid a collapse in demand conspired to push down oil prices to an18-year low of just under US$23 for Brent crude.

While global equity markets gyrated violently, and the health crisis morphed into a full-blown economic crisis, policymakers grappled with how to respond. Central banks across the EM universe implemented rate cuts among other forms of monetary stimulus, with eleven countries lowering (or continuing to lower) rates in April, including China, India, South Africa, Mexico, and Russia. On the fiscal front, many governments responded with massive spending plans. In China, the government implemented an estimated 1.3 trillion renminbi (US$184 billion) program, equivalent to about 1.2% of GDP. Brazil’s government announced a package adding up to 6.5% of the country’s GDP.

Energy stocks suffered the most, falling nearly 30% in thesix-month period amid the collapse in oil prices. Financials, especially banks inoil- and commodity-producing countries like Russia, Mexico, Brazil, and Colombia, were also weak. Expectations for loan growth have fallen with weaker economic activity, and credit losses will also rise due to virus-related business disruption and unemployment.

Communication Services was the best-performing sector, helped by strong performance in Chinese online game stocksTencent and NetEase. Both likely saw a short-term boost to their revenues due to the lockdowns. Health Care was also strong. Information Technology (IT) stocks were relatively resilient amid the pandemic. Hardware and semiconductor companies continue to enjoy growth in demand from the rollout of 5G wireless networks and increased usage of cloud computing services. Consumer Discretionary stocks also fell less than the broad market, led bye-commerce companies such as China’sAlibaba andJD.com as well as online education companies.

strong stock selection in Communication Services, led by Tencent. Our underweight in this strong-performing sector hurt relative returns, however.

By geography, our regional allocations hurt returns; our underweight to the relatively resilient markets of China and Taiwan and overweight to lagging Russia and Mexico, whose economies are heavily dependent on oil production, proved costly. Stock selection was also negative overall. The worst impact came from our holdings in China: negative contributors includedCNOOC, the offshore oil company,51job Inc., an online job search platform, andCSPC Pharmaceutical Group, whose shares fell at the end of the period on fears that regulators had plans to cut reimbursement rates of drugs on the government’s formulary.

There were some notable bright spots in China, includingSF Express, an integrated express delivery company that we bought in December. Quarantines not only drove demand for delivery services, but also gave SF aleg-up on its peers. Using its own trucks and personnel, SF continued to provide service across the nation during the lockdown, while its competitors, reliant on local contractors for “last mile” delivery, were forced to shut down when their deliverymen, many of them migrant workers who had traveled to visit family in distant provinces during the New Year holiday, were unable to return to their urban workplaces.

PERSPECTIVE AND OUTLOOK

EM Financials and the Pandemic

The humanitarian and economic tragedies wrought by the coronavirus pandemic, combined with uncertainty around the timeline for recovery and the pandemic’s ultimate costs, have created an

GEOGRAPHIC EXPOSURE (%) at April 30, 2020

¹MSCI Emerging Markets Index;²The Benchmark does not include Hong Kong;³Includes the remaining emerging markets which, individually, comprise less than 5% of the Index;⁴Includes countries with less-developed markets outside the Index;⁵Includes emerging markets or frontier markets companies listed in developed markets.

robust health care infrastructure and public services and will struggle to contain the virus.

We recognize that massive economic shutdowns could lead to significant losses and capital erosion at our banks. However, we would point to their fundamental strengths, including their solid balance sheets. If our banks had to increase their loss provisions significantly, akin to what they experienced during the global financial crisis a decade ago, their balance sheets could withstand it. For example, Mexico’sGF Banorte has returns on equity of 20% and a tier 1 capital ratio of 13%. (The ratio is a bank’s equity capital and disclosed reserves divided by its total risk-weighted assets.) In a recent stress test that assumed more than a doubling of credit-loss-related charges, management found that its capital ratio would fall to 11%, still well above the minimum regulatory requirement of 8%.

Our banks have track records of surviving past economic dislocations and thriving thereafter. The resilience of Brazil’sItaú Unibanco andBanco Bradescowas tested during the country’s severe recession from 2014 to 2017. Due to their strong capital positions and high returns on assets (ROAs), they had enough cushion to absorb losses through the downturn. Both remained profitable throughout, and their ROAs improved during the recovery as competition waned from state banks saddled with bad loans.

By March, our EM bank stocks were trading at severely depressed valuations. In fact, during the quarter, the valuations of most of our holdings sank below the lows of 2008. At these levels, the market is discounting a severe and prolonged economic downturn. While we place somenon-zero probability on this scenario, we believe there is a greater chance that economies can embark upon a recovery in the second half of 2020, in at least a fair sample of the countries to which we are exposed. We have positive impressions of the speed and extent of government actions across most EMs to provide liquidity to the banking system and regulatory flexibility to allow banks to negotiate the impending period of stress. Moreover, our banks have been successful in managing through bleak economic conditions over the last 20 years. Their skill at crisis management, supported by their robust financial strength and compelling valuations, has led us to stick with our bank investments and, in some cases, add to them.

PORTFOLIO HIGHLIGHTS

As is typical for us, we made only incremental changes to the portfolio in thissix-month period, following our judgments of business quality and growth prospects in relation to the changing relative share prices of the qualified companies we follow.

In Industrials, we bought two Chinese delivery services companies: SF Express (mentioned above) andZTO Express, the country’s largest express courier whose network serves 98% of China’s cities and counties. ZTO is both an enabler and a beneficiary of China’se-commerce boom, providing delivery services for millions of online merchants and customers on Alibaba, Pinduoduo, and JD.com.

PORTFOLIO MANAGEMENT TEAM