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

Harding Loevner Funds

Global equity investing for institutions is Harding Loevner’s exclusive focus. Through Harding Loevner Funds it offers distinct global strategies based on its quality-and-growth investment philosophy. It seeks to purchase shares of growing, financially strong, well-managed companies at favorable prices. Harding Loevner manages each of the Funds’ Portfolios according to a disciplined, research-based investment process. It identifies companies with sustainable competitive advantages and assesses the durability of their earnings growth by conducting in-depth fundamental research into global industries. In constructing portfolios, Harding Loevner diversifies carefully to limit risk.

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David Loevner, CFA, CIC

Chairman of the Funds and

Chief Executive Officer of the Adviser

Ferrill Roll, CFA

Chief Investment Officer of the Adviser

Simon Hallett, CFA

Vice Chairman of the Adviser

Last fall, in our Fiscal Year 2020 Annual Report and Commentary, we expressed some incredulity at “value” investing’s much ballyhooed demise. We had no unique insight to offer about the outlook for the value style other than noting that each prior reading of its last rites seemed to presage its roaring back to life. And, lo and behold, our October 31 missive presciently, if inadvertently, anticipated the turn in market style that coincided with the announcements of the first highly effective COVID-19 vaccines and the imminent change of US presidential administration.

Since November the “value” half of the MSCI All Country World Index has outperformed its “growth” counterpart by more than fifteen percentage points. More significant for us, however, has been the outperformance, by a country mile, of stocks of more leveraged, more cyclical, and less profitable companies relative to the stocks of higher-quality companies that are not so encumbered. The prospect of re-opening economies brightened the outlook for every business (save for the few that provide remote-working tools or home delivery), but it’s been the weakest companies—especially those that were severely challenged during the lockdowns—whose outlook has brightened the most. The Biden administration’s spending plans for consumer relief today and infrastructure tomorrow have further re-enlivened such companies’ prospects. Our portfolio managers, in varying degrees, had been leaning against the then-prevailing winds by resisting the pie-in-the-sky valuations of many of the fastest-growing companies, while maintaining exposure to growth businesses. A related, but separate, trade-off also vexed them: the one between rich valuation and business quality. Their struggle with those trade-offs is the subject of many of the reports that follow this letter.

Another area where we’ve leaned against the wind is in capping the exposure to China permitted in our Emerging Markets Portfolio. China’s market capitalization has swelled on the back of rising valuations and new issuance. Thanks to improved access for foreign investors, the Chinese market has secured a pre-eminent place in passive indices, and as many new companies have gone public it has also become more diversified. We anticipated the

companies’ activities along dimensions such as carbon emissions or diversity, as well as on the results of our engagements with their managements.

As we continue sharpening our focus on ESG, our overarching goal is to deliver strong risk-adjusted returns. Instead of fleeing from any perceived ESG risk regardless of its materiality or the potential opportunity cost of avoiding it, we aim to assess all risks, including ESG risks, properly, identifying which are material and the time frames under which their consequences might be realized. In some instances, we may identify companies or entire industries that have become mispriced in a crowding of the market into fashionable ESG themes. By identifying the most material and persistent trends affecting industries, our analysts are capable of discerning which companies may become impaired, which embroiled in mounting regulation, and which, unheralded today, may thrive. Indeed, recognizing and exploiting such trends is exactly what we expect the best companies to do.

Leaning against the wind is part and parcel of contrarian investing, and any investor must diverge from the crowd in some way to have a chance to outperform. The art comes in judging when and where to diverge, and when simply to accept and appreciate the breeze at your back. We are grateful for your continued trust in Harding Loevner, as we make those judgments.

Portfolio Management Team

Performance Summary

For the Global Equity Portfolio, the Institutional Class gained 24.05%, the Institutional Class Z gained 24.08%, and the Advisor Class gained 23.90% (net of fees and expenses) in the six-month period ended April 30, 2021. The Portfolio’s benchmark, the MSCI All Country World Index, gained 28.29% (net of source taxes).

Market Review

Global stock markets increased in the six months ended April 30, as the rollout of several successful COVID-19 vaccines led to economic rebounds across the globe. All sectors and regions finished in positive territory for the period.

The closing months of 2020 saw a dramatic rise in global stock markets, despite an escalation in the global pandemic. The starting gun for the run-up was Pfizer’s announcement of better-than-expected results for its COVID-19 vaccine trials and was followed in rapid fire by positive reports from Moderna, AstraZeneca, and Sinopharm. Accelerated approvals gave investors further hope for some return to normal commerce in 2021, even as COVID-19 hospitalizations in the US and Europe soared.

In 2021, signs of a global economic rebound multiplied as the vaccination efforts began in earnest. In March, the IMF raised its global GDP growth forecast for 2021 to 6.0%. In the US, among the world’s leaders in vaccination rates, retail sales climbed to the strongest level on record and restaurant bookings and the number of airline passengers, while still below pre-COVID-19 levels, continued to improve. The Biden administration passed a colossal US$1.9 trillion relief package, the third such stimulus measure

As homebuyers and corporate treasurers alike raced to lock in low interest rates, bond yields rose, with the yield on the US 10-year reaching pre-pandemic levels in March. Commodity prices, particularly those linked with industrial activity such as iron ore and copper, jumped higher, while Brent crude rose to over US$60 per barrel.

On a sector basis, Energy was the strongest performer, surging in lockstep with rising oil prices. Financials also performed strongly, aided by a steepening yield curve and surprisingly low credit defaults. Information Technology (IT) also outperformed despite heightened scrutiny from regulators in Europe, China, and the US. Less-cyclical sectors—Consumer Staples, Health Care, and Utilities—all underperformed for the period.

Viewed by geography, the eurozone outperformed as some of the countries hit hardest by the virus, such as Spain and Italy, began to recover. Canada was a big outperformer, helped by its large weighting in banks and Energy. In Europe outside the eurozone, the UK posted strong returns on the back of its expansive vaccination program. Japan significantly underperformed as the country instated a new, more stringent state of emergency in response to another virus wave. Emerging Markets (EMs) also underperformed as weakness in China due to its regulatory crackdowns on tech companies offset strong performance in Taiwan and Russia, where the global semiconductor shortage and the rise in the oil price helped the former’s IT and latter’s Energy companies, respectively.

Performance Attribution

The Portfolio underperformed due to both negative sector allocation and stock selection. Weak stocks in Communication Services and Consumer Discretionary detracted the most during the period. In the former, shares of Polish video game producer CD Projekt were buffeted as the highly anticipated launch of its game Cyberpunk 2077 was marred by bugs and the company

Perspective and Outlook

For the best part of our 30-year existence we’ve invested in high-quality, growing companies. That means we understand only too well the slings and arrows of performance that the market occasionally hurls the way of our quality-focused portfolio. During the recovery from the prolonged bear market that followed the bursting of the tech bubble in 2000 we suffered one of our worst periods of relative performance. As the profit slump—at the time the deepest since the 1930s—dragged into its second year, the US Federal Reserve led other central banks in further rounds of cutting interest rates in a bid to spur a stronger recovery. Investors who had fled the securities of barely profitable or highly leveraged companies reconsidered their cautious stance. Companies that were priced as if they might be the next round of bankruptcies suddenly looked like probable survivors, and their share prices leapt higher as investors adjusted to the upgraded prognosis. As cyclical and financial risks receded, stocks of the most stable companies, with ultra-conservative balance sheets and resilient profit margins, no longer transfixed investors, whose eyes wandered to less pristine corporate stories in hopes of a bargain. Over the ensuing 24 months, stocks of companies in the lowest tiers of quality, derided as junk, trounced by double digits those in the top tiers.

Judging by the performance of the different quintiles of the market sorted by our proprietary quality rankings, the shift in market style that coincided with the early November release of vaccine efficacy results matches in many ways the pattern of 2003-2004, and then some. Whereas two decades ago it took over two years for the bottom quintile to outpace the top by 19 percentage points, this latest go-round has produced a 23 percentage point gap between the same two groups in just five months, with a mostly monotonic progression of performance down the tiers of quality: the worse you were, the better you did.

The earlier episode drove home the perils of being too risk-averse! While wallowing in the depths of a deep recession and long bear market, we took comfort from the resilience and reasonable valuation of the best companies and—despite the obvious chasm in relative valuations that had opened up between stocks of the best and the next-best, let alone the worst—ultimately lost sight of the opportunity cost of future returns from what we did not own.

Over the last couple of years, as valuations for high-quality and rapidly growing companies have risen steadily, we’ve had to make difficult trade-offs in attempting to balance our commitment to these company attributes against the prices their shares fetch. Historically our debate has mostly concerned the trade-off between valuation and growth, but in this nascent recovery from the pandemic, the real issue—at least as far as relative performance goes—has turned out to be related more to trading off valuation against quality. Growth,

differentiated portfolios of high-quality growing businesses. Our risk guidelines, including our portfolio limits on countries, sectors, and single companies, limit the worst of those inclinations, and we alter those limits only rarely and with great deliberation. In other words, don’t expect us to follow the current trend of some growth and momentum-oriented investors and to jettison our single holding limits to amass larger stakes in our favorite companies.

Portfolio Highlights

We ended the period overweight to Health Care, IT, Financials, Industrials, Communication Services, and underweight to Consumer Staples, Consumer Discretionary, Energy, and Utilities. The Portfolio had no holdings in Materials or Real Estate.

Health Care remains the Portfolio’s largest overweight, boosted by the purchase of two new US-based holdings—Edwards Lifesciences and UnitedHealth Group—and one new Chinese holding—WuXi Biologics. We believe Edwards, whose SAPIEN valve is the most implanted heart valve in the world, can continue to grow revenue and earnings for the foreseeable future due to the shift from open-heart surgery to transcatheter aortic valve replacement. UnitedHealth is one of the largest diversified healthcare companies in the United States and is pioneering innovative payment systems and health care delivery methods that should allow it to maintain its status as the premier private insurer. Additionally, legislative risk impacting the company has appeared to decrease post-election. Wuxi has become the dominant company in China’s rapidly growing biopharmaceutical industry and is gaining significant traction outside China as well. As Wuxi’s capabilities increase, we believe the company will win more late-stage development projects given its innovative manufacturing strategy and lower cost, highly talented workforce.

While we continue to be overweight the Financials sector, we have shifted the composition away from a group of banks located in struggling emerging economies in favor of enlarged holdings of two US banks: SVB Financial Group and First Republic Bank. Both cater to lucrative niche markets and prioritize impeccable service as a means of growing through referrals from their affluent and contented clientele.

In Energy, we bought two new holdings: US-based Schlumberger and Finland-based Neste. Schlumberger’s management has continually invested, through good times and bad, to extend its technological lead in oil servicing. Its latest moves include improving its data analytics platform to enable customers to leverage their data for greater efficiencies and embarking on new clean energy ventures. Over the last two decades Neste has developed technology that turns used cooking oil and waste animal fats into transport fuel and cultivated the requisite network to source and collect the feedstock. Most biodiesel fuels utilize crop-based feedstocks such as palm oil, a commodity widely blamed for deforestation; Neste’s next-generation process suffers no such overhang. We expect regulators in Europe, as part of their efforts to mitigate climate

Portfolio Management Team

Performance Summary

For the International Equity Portfolio, the Institutional Class gained 24.26%, the Institutional Class Z gained 24.30%, and the Investor Class gained 24.11% (net of fees and expenses) in the six-month period ended April 30, 2021. The Portfolio’s benchmark, the MSCI All Country World ex-US Index, gained 27.41% (net of source taxes).

Market Review

International stock markets increased in the six months ended April 30, as the rollout of several successful COVID vaccines led to economic rebounds across the globe. All sectors and regions finished in positive territory for the period.

The closing months of 2020 saw a dramatic rise in global stock markets, despite an escalation in the global pandemic. The starting gun for the run-up was Pfizer’s announcement of better-than-expected results for its COVID-19 vaccine trials and was followed in rapid fire by positive reports from Moderna, AstraZeneca, and Sinopharm. Accelerated approvals gave investors further hope for some return to normal commerce in 2021, even as COVID-19 hospitalizations in the US and Europe soared.

In 2021, signs of a global economic rebound multiplied as the vaccination efforts began in earnest. In March, the IMF raised its global GDP growth forecast for 2021 to 6.0%. In the US, among the world’s leaders in vaccination rates, retail sales climbed to the strongest level on record and restaurant bookings and the number of airline passengers, while still below pre-COVID-19 levels, continued to improve. The Biden administration passed a colossal

year reaching pre-pandemic levels in March. Commodity prices, particularly those linked with industrial activity such as iron ore and copper, jumped higher, while Brent crude rose to over US$60 per barrel. On a sector basis, Energy was the strongest performer, surging in lockstep with rising oil prices. Financials also performed strongly, aided by a steepening yield curve and surprisingly low credit defaults. Information Technology (IT) also outperformed despite heightened scrutiny from regulators in Europe, China, and the US. Less-cyclical sectors—Consumer Staples, Health Care, and Utilities—all underperformed for the period.

Viewed by geography, the eurozone outperformed as some of the countries hit hardest by the virus, such as Spain and Italy, began to recover. Canada was a big outperformer, helped by its large weighting in banks and Energy. In Europe outside the eurozone, the UK posted strong returns on the back of its expansive vaccination program. Japan significantly underperformed as the country instated a new, more stringent state of emergency in response to another virus wave. Emerging Markets (EMs) also underperformed as weakness in China due to its regulatory crackdowns on tech companies offset strong performance in Taiwan and Russia, where the global semiconductor shortage and the rise in the oil price helped the former’s IT and latter’s Energy companies, respectively.

Performance Attribution

The Portfolio underperformed due to both negative sector allocation and stock selection. Weak stocks in Consumer Discretionary and Materials detracted the most during the period. In the former, shares of Japan’s largest home furnishing retailer NITORI fell as investors worried about their hostile acquisition of competing furniture retail chain Shimachu, rather than celebrating their 34th consecutive year of earnings growth. In Materials, shares of German flavors-and-fragrance maker Symrise declined as the company experienced slower organic sales growth in its beverage and sweets segments and faced rising raw

has enjoyed strong demand for its high-performance chips from Apple (who unveiled new Mac and iPad models which utilize the TSMC-manufactured M1 processor) and other customers like NVIDIA and Mediatek (who rely on TSMC to execute its own leading-edge designs). At the same time, TSMC legacy nodes saw unusually high demand on widespread chip shortages from auto to consumer applications. Strong stocks in Pacific ex-Japan also contributed, especially Singapore-based bank DBS Group, which has continued to show strong business momentum, supported by the financial strength it has demonstrated throughout the pandemic.

Perspective and Outlook

For the best part of our 30-year existence we’ve invested in high-quality, growing companies. That means we understand only too well the slings and arrows of performance that the market occasionally hurls the way of our quality-focused portfolio. During the recovery from the prolonged bear market that followed the bursting of the tech bubble in 2000, we suffered one of our worst periods of relative performance. As the profit slump—at the time the deepest since the 1930s—dragged into its second year, the US Federal Reserve led other central banks in further rounds of cutting interest rates in a bid to spur a stronger recovery. Investors who had fled the securities of barely profitable or highly leveraged companies re-considered their cautious stance. Companies that were priced as if they might be the next round of bankruptcies suddenly looked like probable survivors, and their share prices leapt higher as investors adjusted to the upgraded prognosis. As cyclical and financial risks receded, stocks of the most stable companies, with ultra-conservative balance sheets and resilient profit margins, no longer transfixed investors, whose eyes wandered to less-pristine corporate stories in hopes of a bargain. Over the ensuing 24 months, stocks of companies in the lowest tiers of quality, derided as junk, trounced by double digits those in the top tiers.

Judging by the performance of the different quintiles of the market sorted by our proprietary quality rankings, the shift in market style that coincided with the early November release of vaccine efficacy results matches in many ways the pattern of 2003-2004, and then some. Whereas two decades ago it took over two years for the bottom quintile to out-pace the top by thirteen percentage points, this latest go-round has produced a 21 percentage point gap between the same two groups in just five months, with a mostly monotonic progression of performance down the tiers of quality: the worse you were, the better you did.

The earlier episode drove home the perils of being too risk-averse! While wallowing in the depths of a deep recession and long bear market, we took comfort from the resilience and reasonable valuation of the best companies and—despite the obvious chasm in relative valuations that had opened up between stocks of the best and the next-best, let alone

influence on discount rates. Considering such attempts a fool’s errand, we prefer instead to focus on discerning the enduring characteristics of companies themselves—characteristics that tend to persist across business cycles and political eras.

Our investment process is designed to give analysts the freedom, with few exceptions, to “go anywhere,” and locate the best businesses even in out-of-favor industries or countries. By keeping our opportunity set broad, always on the lookout for companies with strong competitive positions and secular growth tailwinds, the goal is to continuously furnish portfolio managers with sufficient raw materials from which to assemble diversified and differentiated portfolios of high-quality growing businesses. Our risk guidelines, including our portfolio limits on countries, sectors, and single companies, limit the worst of those inclinations, and we alter those limits only rarely and with great deliberation. In other words, don’t expect us to follow the current trend of some growth- and momentum-oriented investors and to jettison our single holding limits to amass larger stakes in our favorite companies.

Portfolio Highlights

Even after the sharp underperformance of high-quality stocks during the period, we remained concerned about stretched valuations. We sold German sportswear brand Adidas due to a high valuation coupled with concerns for its future growth path, trimmed expensive stocks within the IT and Health Care sectors—dominant Taiwan-based semiconductor foundry TSMC, French industrial software maker Dassault Systèmes, and Swiss-based contract pharmaceutical manufacturer Lonza—and opportunistically added on weakness to some more attractively valued stocks such as Chinese e-commerce giant Alibaba and Japanese drugmaker Shionogi.

Additionally, we made several new purchases at attractive entry points. CSPC Pharmaceuticals is one of China’s major pharmaceutical companies with a strong national sales presence, a portfolio of novel and generic pharmaceuticals already in the market, and a strong pipeline of products in development. We bought the shares on weakness triggered by government-mandated price cuts to the company’s largest seller, a drug used to treat hypertension and prevent strokes. Despite this short-term setback, we expect that higher volumes for the drug combined with new approvals will propel profit growth for years to come.

In Materials, we purchased Australian mining company BHP. We believe the market has undervalued its enduring competitive advantage due to its low-cost iron and copper mining operations which has allowed the company to deliver consistent profits and cash flows across the inevitable ups and downs of the global metals cycle. While the variability of commodity prices prevents BHP from scoring in the top ranks of measured quality, we are willing to bear some of that uncertainty in return for a more attractive valuation given the company’s strong business fundamentals.

Portfolio Management Team

Jafar Rizvi, CFA

Co-Lead Portfolio Manager

Anix Vyas, CFA

Co-Lead Portfolio Manager

Performance Summary

For the International Small Companies Equity Portfolio, the Institutional Class gained 22.29% and the Investor Class gained 22.16% (net of fees and expenses) in the six-month period ended April 30, 2021. The Portfolio’s benchmark, the MSCI All Country World ex-US Small Cap Index, gained 34.44% (net of source taxes).

Market Review

International small cap stocks rose in the six-month period ended April 30, 2021, with all sectors and regions ending in positive territory. Towards the beginning of the period, accelerated approvals of COVID-19 vaccines gave investors hope for some return to normal commerce in 2021 even as COVID-19 hospitalizations in the US and Europe soared. After a pause in January as the world stood agape at the fraught events transpiring on the US political landscape, many of the trends that began with the vaccine announcement in early November resumed.

Signs of a global economic rebound multiplied as the vaccination efforts began in earnest. The IMF raised its global GDP growth forecast for 2021 by 0.3% to 6.0% since its last update in October. In the US, which has been among the world’s leaders in vaccination rates, retail sales climbed to the strongest level on record. Restaurant bookings and the number of airline passengers, while still below pre-COVID-19 levels, also continued to improve. The Biden administration passed a colossal US$1.9 trillion relief package, the third such stimulus measure since the pandemic began, sending direct payments to millions of Americans and extending unemployment insurance. The recovery in Europe, however, remained precarious, amid the emergence of new more contagious virus strains and problems with its vaccine rollout extending or renewing lockdowns.

from commodity-driven markets such as Russia, Brazil, and South Africa. Pacific ex-Japan also fared well, helped by Australia, which rebounded alongside a global recovery in commodity prices. While the Nikkei hit a three-decade high this quarter, the positive investor sentiment appears geared to larger, more export-driven companies, weighing on small cap returns in Japan.

By style, value was the standout, further reversing its lengthy period of underperformance and continuing the rally started in November. The cheapest stocks, heavily concentrated among financial and energy companies, outperformed the most expensive stocks by more than 1,000 basis points. Similarly, lower-quality companies, typically those with higher leverage and more volatile revenues and earnings, outperformed high-quality companies by more than 2,000 basis points. Shares of low-growth companies outperformed modestly, though with a less muted effect across quintiles of growth.

Performance Attribution

The Portfolio’s underperformance was driven primarily by weak stocks.

Our stocks in the Information Technology (IT) sector, and particularly the software and services industry where the shift toward cheaper, more cyclical stocks was pronounced and where we have a large weight, hurt the most during the six-month period. Companies such as Israeli-based cybersecurity specialist CyberArk and Canada-based supply chain management software provider Kinaxis were among the Portfolio’s largest relative detractors. Performance across the Portfolio suffered from the same valuation-related headwinds.

Another large detractor in IT was Finnish instrument producer Vaisala, which manufactures weather instruments used at airports and other testing and measurement devices used by pharmaceutical and utility customers. The unprecedented (and, we

Perspective and Outlook

Many have described the past year as “COVID time,” referring to an alternation of the monotony of social distancing with the fear of infection and death, and how each day seemed simultaneously to crawl and to fly. A similar phenomenon presented in our asset class. Rarely, if ever, has there been a period when an entire multi-year market cycle seemed packed into twelve months. In fact, when looking back and trying to make sense of our own Portfolio’s experience, it feels more appropriate to talk of the three distinct phases of the cycle since March.

The first started the week beginning March 9, when the index coughed up the first 15% of its value in a week. The selling was especially fierce in some of the lower-quality reaches of the Small Cap Index, where investors fled from financially weak companies as they sought safety and quality above all else. Our Portfolio’s permanent aversion to such companies helped limit the damage during this period, much like in past periods of market distress.

The second phase started in early May, as massive liquidity injections by the world’s central banks were initiated to help limit the economic damage. As people began to look beyond the present business distress, fear receded and expectations of a V-shaped recovery took hold. Investors’ attention turned from strong balance sheets to sustainable growth prospects, providing a further tailwind to a Portfolio that is also highly tilted toward the fastest growers.

This phase lasted until early November, when a flurry of vaccine breakthroughs encouraged the thought of a return to normalcy in 2021. International small caps jumped by nearly 1,400 bps during the month, led predominantly by lower-quality companies that were, during the first phase, thought to be at greatest financial risk. In this “junk” rally, our Portfolio lagged, ultimately giving up nearly 425 bps of relative performance in November alone. This trend continued until the end of March, after which growth stocks staged a brief recovery in April of this year. It is difficult to determine whether this recovery was the start of another regime shift; however, our focus on the long-term remains un-wavering. Our process affords us flexibility to pursue a number of avenues for seeking returns but stooping to pick up cigar butts isn’t one of them.

There is value in pausing here to reflect on how international small caps have performed through other market cycles. With the ever-valid caveat that the past is not a guarantee of future returns, history does provide an empirical basis for thinking about the returns from small caps. While international small caps are indisputably more volatile than international large caps, their returns have been demonstrably higher, by an average of 320 bps a year over the past twenty years, enough to outperform large caps on a risk-adjusted basis over that period (Sharpe ratio of 0.40 vs. 0.25). As active managers, though, we are attracted to the potential afforded by this vast opportunity set of over 10,000

investors to seek growth at almost any cost. Our response to this growing challenge has been incremental; we have reacted to perceived overvaluations, selling for something more reasonably priced, one stock at a time. Unfortunately, an incremental approach is ineffective (“too little too late”) once a junk rally begins. Regardless, factor rotation is not driving our decisions. We have no particular skill in identifying when style factors will be in or out of favor. Factors can rotate a few times even within a year, as they did in 2020. Our focus remains on identifying high-quality companies that can grow throughout market cycles. And we pay attention to valuations.

Portfolio Highlights

Our aim is to construct a well-diversified Portfolio that can withstand the full spectrum of “known unknowns” including short-term economic developments and bond yield fluctuations. The Portfolio is invested in businesses able to grow during downturns, such as our software holdings, as well as those reliant on expanding economic activity for growth. One example of the latter that we exited this period, though not by choice, was Signature Aviation, the leading UK-based fixed-base operator (FBO) of business jets, which is being taken private by a consortium of private equity firms. Travel limitations imposed by the pandemic presented challenges, but the company was able to surmount them.

We made four new purchases in the six-month period, each in a different sector, resulting in changes within the Portfolio’s sector exposures. In Industrials, we added HomeServe, a UK-based provider of subscription-based home repair service memberships in the UK, US, France, and Spain. It has exclusive long-term agreements with numerous utilities and municipal partners, and a large network of tradespeople, enabling the company to serve customers efficiently at lower costs. Increasing household formation underpins our expectations of sustainable long-term growth for the company.

Another UK company added during the period was Cranswick, which makes pork and poultry products on a private label basis. The company has 16 production facilities focused on everything from pig breeding and broiler farms to feed mills to preparation and packaging plants. All adhere to the latest environmental, ethical treatment, and non-GMO standards, which we think will allow Cranswick to achieve superior growth and profitability. Its poultry business, which is relatively new, is growing quickly by leveraging Cranswick’s existing customer relationships and reputation as a high-quality protein manufacturer.

We also purchased Solasto, the second-largest provider of outsourced medical administration services in Japan. The company’s focus on raising employee productivity through the adoption of IT solutions allows it to provide more services without hiring more employees. This approach is essential in Japan because of the country’s aging society and labor scarcity, and we think this positions the company to continue to grow profitably.

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, the Institutional Class rose 25.05% and Class Z rose 25.12% (net of fees and expenses). For the Emerging Markets Portfolio, the Advisor Class rose 24.97% (net of fees and expenses) in the six-month period ended April 30, 2021. The Portfolios’ benchmark, the MSCI Emerging Markets Index, rose 22.95% (net of source taxes).

Market Review

Stocks in Emerging Markets (EMs) rallied in the first half of the fiscal year as news late in 2020 that vaccines had demonstrated exceptional levels of efficacy in final trials provided the catalyst for upgrading of global growth expectations and renewal of interest in those markets and industries worst hit by the COVID-19 pandemic. This, in turn, also boosted EM currencies, with the majority making significant gains versus a persistently weak dollar. The prospect of a stronger, broader-based recovery combined with China’s continued economic health and anticipation of the Biden

sector also continued to enjoy strong gains, led by semiconductor and other hardware manufacturers. Consumer Discretionary was the only sector in the index to decline, weighed down by index heavyweight Alibaba and its regulatory woes.

Performance Attribution

The Portfolio outpaced the index in the first half of the fiscal year due to strong stocks in Consumer Staples, Energy, and Consumer Discretionary. Our underweight the latter lagging sector was also helpful.

In Staples, the re-mobilization of consumers in Latin America and EM Europe helped to revive the shares of three beverage businesses: UK-based Coca-Cola HBC, Mexico’s FEMSA, and Brazil’s Ambev. In Energy, higher oil prices boosted the shares of two Russian-based companies, Lukoil and oil and natural gas producer Novatek, as well as Tenaris, a high-end oil pipe manufacturer. All fared better than Brazil-based Petrobras, whose well-respected CEO was ousted by President Jair Bolsonaro due to disagreement over fuel prices. In Consumer Discretionary, strong holdings included duty-free retailer China Tourism Group Duty Free and Taiwan’s Eclat Textile, which reported that customers such as Under Armour have increased their sales forecasts for 2021. Our underweight versus the benchmark in embattled Alibaba also helped relative returns.

The Portfolio’s lack of holdings in the top-performing Materials sector was the main detractor this period.

By region, key positive contributors to relative returns were our overweights in Brazil and Mexico as well as the Portfolio’s off -benchmark investments in China-focused companies listed in Hong Kong. Hong Kong-listed power tool manufacturer Techtronic Industries has continued to gain share thanks to innovative new products, and semiconductor equipment manufacturer

Amid the increasingly crowded field, achieving stand-alone dominance in EV manufacturing will likely require a company to achieve (and maintain) the automobile equivalent of the iPhone: a uniquely attractive combination of hardware, software, and aesthetics. Tesla has come as close as any company to hitting on all three, but whether its edge can prevail is an open question. The software domain would appear to provide the most scope for enduring differentiation, but we think a single EV-maker is less likely to win out here than a software/systems specialist, such as China’s Waymo or Baidu, that will partner with multiple manufacturers to achieve scale. Tesla has enviable first-mover advantage in hardware (including manufacturing cost efficiency) and some aspects of software, with its revered user interface. We think it’s likely, however, that as the diversity of customer preferences are revealed, others will challenge Tesla for leadership in certain areas, be it drive-ability, style, or entertainment.

We can only speculate about how the EV industry will ultimately shake out. This lack of fundamental foresight makes us wary of predicting long-term winners among today’s brands, though we will continue to watch for companies that offer sufficient quality characteristics and durable growth potential. In the meantime, we have chosen to gain exposure to the EV growth opportunity through other ways very much aligned with our focus on quality-growth companies. In common with all other industries, our goal with respect to EVs is to invest in firms that offer predictable growth in their core businesses augmented by new growth opportunities exploitable by farsighted management. Indeed, we already have three EV-related holdings that fit this something-old/something-new profile:

Hon Hai Precision

Hon Hai Precision, also known as Foxconn, is the world’s leading provider of electronics manufacturing services (EMS), producing such iconic products such as the iPhone, Amazon Kindle, and Sony PlayStation. With its expertise in both hardware and software, combined with its massive scale and powerful supply chain management, Hon Hai offers its clients unrivaled speed-to-market at large scale and low cost. Its assembly capabilities are augmented by its ability to make certain components, such as iPhone casings, itself, from scratch. This reduces Hon Hai’s costs and allows it to make larger investments in research and development than smaller competitors.

One of Hon Hai’s recent growth initiatives has been entering the automotive industry, specifically EVs. It already offers a thousand EV components and counts Tesla among its customers. Hon Hai is an attractive supplier to EV manufacturers because of its expertise in the production of light metal structural parts, its experience in managing complex supply chains, and its expertise in products that integrate software with hardware (Exhibit A: the iPhone). Hon Hai has already designed a chassis and mapped out a production schedule for new models for three brands in 2022. Hon Hai is also building its own hardware and software “open platform,” called MIH. With contributions from Hon Hai’s partners and third-party developers,

Its initiatives include developing electric traction systems for buses, trains, and other modes of transport. In 2019, WEG stepped up its activity in this segment by becoming a key part of the VW-coordinated “e-Consortium” focused on developing electrical mobility in Brazil. WEG supplies the powertrain system globally for all VW electric delivery trucks and also makes the motors to power the air conditioning and other auxiliary systems. WEG’s initiatives in electric mobility are currently just a small part of the company’s many climate-related growth opportunities. The company has a larger wind and solar energy business, for example, that includes manufacturing solar energy kits for home use that have been gaining popularity in many markets.

Silergy

A new holding this period is Silergy, a Taiwan-listed manufacturer of power-management integrated circuits (PMIC) used in a range of electronic equipment, from computer tablets to industrial robots. The company’s design and manufacturing platform is highly integrated: it operates its own chip fabrication (“fab”) facilities, which enables the company to stay a step ahead of competitors with more intelligent or efficient products. Silergy has steadily increased its share of the PMIC market and enjoyed about a 15% cumulative annual growth rate of revenues and profits over the last five years.

Silergy has been investing for years in R&D to produce PMICs suitable for automotive applications. The recent chip shortage has prompted automakers to expand their suppliers of PMICs, presenting an opportunity for Silergy to enter the highly competitive supply chain. Silergy’s automotive-related revenues will likely exceed 5% of sales in 2021 and could double next year. Management has been vocal about its attractive near-term opportunities in telematics, infotainment, advanced driver-assistance systems, and LED lighting.

Portfolio Highlights

In 2020 and the early weeks of 2021, shares of a small group of fast-growing companies posted exceptionally strong returns, even after these shares were already looking quite expensive. Starting in mid-February, many of the expensive growers suffered rising share price volatility and moderate to significant reversals. A spike in volatility can reflect rising controversy in the market’s interpretation of the investment thesis—perhaps in some cases there is less certainty over the path to profitable growth—but it could just as well be rising interest rate expectations that increase the discount demanded in the present for those rosy earnings projections.

High valuations can represent a significant risk to growth stocks and growth investors, risk that quickly multiplies if lofty growth expectations are not allied with fundamental quality providing the foundation for sustainable profit growth. We have avoided many of the highest flyers of 2020. The issue for us often comes down to the quality component of our process—we demand, among other markers of quality, a track record of profitability and cash

Portfolio Management Team

Pradipta Chakrabortty

Lead Portfolio Manager

Jingyi Li

Portfolio Manager

Wenting Shen, CFA

Portfolio Manager

Performance Summary

The Chinese Equity Portfolio was launched on December 16, 2020. The Institutional Class rose 7.20% (net of fees and expenses) since launch through April 30, 2021. The Portfolio’s benchmark, the MSCI China All Shares Index, rose 4.02% in this period (net of source taxes).

Market Review

China largely got the COVID-19 outbreak under control by June 2020, and in response its economy continued to pick up steam during the first half of the fiscal year. Business activities re-accelerated while stringent border controls stayed in place to maintain a COVID-19-free domestic environment. In January 2021, new cases were detected for the first time in months, but testing mandated by local governments and stay-in-place orders in a handful of cities proved effective in curtailing the outbreak. Because many migrant workers elected not to travel during the Chinese New Year, industrial production following the weeklong holiday resumed more quickly than in previous years, with industrial activity readings posting their 13th consecutive month of expansion.

In March 2021, China launched its 14th Five-Year Plan and its 2035 long-term plan. Policy discussions surrounding these plans have reemphasized past areas of priority such as technological innovation and domestic consumption, while continuing to press ahead with reforms of state-owned enterprises (SOEs) and financial markets. In a sign of how other priorities have moved up the focus list, officials revealed a surprising level of detail around a previous pledge to achieve peak carbon emissions by

Performance Attribution

The Portfolio’s outperformance was primarily due to strong holdings in Consumer Discretionary and Information Technology (IT) as well our overweights in Health Care and Industrials.

In Consumer Discretionary, duty-free shop operator China Tourism Group Duty Free rose as January’s COVID-19 uptick failed to dissuade travelers from flocking to tropical Hainan island to vacation. The company is benefitting from a recent increase in the quantity of Western luxury goods that can be brought from Hainan to the mainland duty-free, part of a multi-year initiative to incentivize spending domestically instead of in duty-free stores overseas.

We had broad-based positive stock selection in IT, where our holdings are primarily equipment and precision parts manufacturers such as ASM Pacific Technology (semiconductor equipment), Sunny Optical (optical components), and Silergy (electronic components). Shares of these companies performed well this period due to rising sales for their industrial customers in the automotive, smartphone, and semiconductor sectors.

Consumer Staples detracted from our performance as Foshan Haitian, a soy sauce and condiments producer, gave back some of its gains after a strong 2020. Our lack of Chinese bank holdings also hurt relative performance.

Perspective and Outlook

China has achieved a near-legendary transition from having an economy reliant on legacy-heavy industry and infrastructure investment to one defined by, among other facets, skilled labor, unprecedented internet connectivity, and rising incomes for a vast number of Chinese.¹ This transition has been accompanied by a rise of consumer power, a significant portion of it expressed online. The figures are impressive—estimates place the size of China’s middle class between 400-700 million individuals; China is now the world’s biggest market for luxury goods, smartphones,

The investment approach for the Chinese Equity Portfolio is consistent with the other Portfolios offered by Harding, Loevner Funds, including our Emerging Markets (EM), International, and Global Equity Portfolios, each of which have been investing in China for over 20 years. We invest only in companies meeting, in our judgment, four criteria: they must possess a competitive advantage, generate sustainable superior long-term growth, have the financial strength to fund growth and withstand difficult conditions, and possess farsighted and dynamic management capable of exploiting these advantages for the benefit of shareholders. We identify investments based on the insights of our global industry specialists, with years of experience investing across multiple geographies and different stages of market maturity and product lifecycles, and our China specialists, who each bring formidable local expertise and knowledge. Our longer-term investment horizon should also provide a source of edge in the Chinese market, which even today remains heavily driven by retail investors with speculative inclinations, who often move as a herd, driving share prices far above or below fair value, creating (in the latter case) buying opportunities for fundamental investors like us.

Contemplating Investment Risks

One question that naturally arises when launching a China-focused Portfolio is how we approach the risks that accompany investing in this country. For Harding Loevner, the assessment of risk for any security, including Chinese securities, stems from our insistence on business quality as a condition of purchase. In not compromising our commitment to strong balance sheets in good times, we potentially lessen the risk of permanent losses relating to financial distress and can therefore place a higher degree of confidence in our estimates of long-term value. However, there are indeed some elements of company, quality, and industry specific to China that deserve focus. For example, relating to financial strength, some Chinese companies appear to be highly free-cash generative businesses, able to maintain robust cash balances despite their rapid growth—yet we have observed the occasional phenomenon of firms parking cash in opaque wealth management products issued by non-bank institutions.2 Another example of risk we evaluate while analyzing a company’s industry structure is whether sudden shifts in regulatory policy affect the bargaining power of buyers and suppliers.

The careful analysis of corporate governance is also of particular import as we scour the Chinese equity universe, especially for companies where government entities have significant ownership and presence in boards. In China, as elsewhere, our approach is focused on identifying signs of poor corporate governance that typically destroy shareholder value. If a potential problem surfaces, we contemplate and evaluate the risk of value destruction based on facts and circumstances. In such a large and diverse market, there are bound to be firms that are not up to the

²Part of the country’s shadow banking system, these products provide little transparency on underlying assets. Moreover, they are treated as off-balance sheet items and therefore, the institutions which manage them usually offer no implicit assumption of capital loss.

Our largest overweight is in the Industrials sector, comprised of domestic leaders in China’s automation market. Over the past three decades, China has grown to become the “world’s factory,” with roughly 30% share of global manufacturing output today. It accounts for an even higher portion of world production in labor-intensive categories such as electronics and automobiles. China was able to establish manufacturing leads in these categories due in part to its sizable low-cost labor force, and also because entire supply chains with better logistical efficiency than elsewhere were created onshore thanks to supportive economic and regulatory policies, and substantial investment in what are now top-class transportation and broadband networks. However, the labor market has changed: wages have risen considerably, and that is set to continue as the number and proportion of working-age Chinese individuals peaked in 2015. Barring an unlikely opening to immigration, China will realize in the next few decades one of the largest drops in working age population of any country.

This prospect has spurred an increased emphasis on industrial automation. The density of robot use in China remains only 20% to 50% of levels in Japan, Korea, and Germany, which presents significant opportunities for Chinese automation companies to better meet the needs of a local market that had previously been underserved by global rivals. Shenzhen Inovance Technology is China’s largest producer of industrial automation control components. We think its customization strategy will actually be its biggest advantage over multinational rivals, as it funnels resources into developing products that better suit the needs of local industries like battery manufacturing that are much better represented in China than elsewhere. As the EV supply chain consolidates, strong secular EV demand combined with an expected shift to a more modular value chain, similar to that of smartphones, should help Inovance take further share of both EV powertrain components and the robots used to put the vehicles together. Another portfolio company, Haitian International, focuses on very large high-precision injection molding machines with better energy efficiency than competitors’ equipment. Its long-term growth will be propelled by capacity expansion and new product launches to meet increasing demand from domestic industries such as automobiles and home appliances.

It is worth noting that our Chinese Equity Portfolio has underweights in more cyclical areas of the market. The largest of these underweights is in Financials; we do not own any Chinese banks, as most do not meet our quality hurdle. Nor do we own stocks in the Materials and Energy sectors, where we prefer businesses favorably positioned at the lower end of global cost curves. We have yet to discover commodity-oriented companies in China meeting that criterion.

Portfolio Management Team

Pradipta Chakrabortty

Co-Lead Portfolio Manager

Babatunde Ojo, CFA

Co-Lead Portfolio Manager

Performance Summary

For the Frontier Emerging Markets Portfolio, the Institutional Class I gained 16.76%, the Institutional Class II gained 16.96% and the Advisor Class gained 16.44% (net of fees and expenses) in the six-month period ended April 30, 2021. The Portfolio’s benchmark the MSCI Frontier Emerging Markets Index, gained 10.22% (net of source taxes).

Market Review

Frontier Emerging Markets (FEM) rose, gaining 10% during the six-month period ended April 30, 2021. The period was turbulent, beginning with an escalation in the global pandemic towards the end of 2020, followed by vaccine breakthroughs that gave investors concrete hope for normalization in 2021, ultimately ending with a reversal of this rebound in January. Optimism over the clinical trial success of vaccines that initially lifted FEMs’ performance in late 2020 flagged as it became apparent just how much FEM countries (with a few exceptions, like the United Arab Emirates) would lag in their access to, and ability to roll out, the vaccines to their populations. These concerns were then amplified by new waves of COVID-19 infections and the emergence of even more contagious and deadly variants of the virus, prompting further mobility restrictions and business disruptions.

Companies that benefited from the pandemic and the abrupt shift to remote work and commerce, many of them within Information Technology (IT) and Health Care, far outpaced more cyclical sectors such as Financials and Consumer Discretionary, which nonetheless also finished in positive territory. Energy, however,