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

Harding, Loevner Funds, Inc.

Global equity investing is Harding Loevner’s exclusive focus. Through Harding, Loevner Funds, Inc. 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

Chairman of the Funds and Adviser

Aaron Bellish

Chief Executive Officer of the Adviser

Ferrill Roll, CFA

Chief Investment Officer of the Adviser

Over the past 12 months, global stock prices have risen appreciably, especially when viewed in their local currencies. Most local equity indexes have regained or surpassed their pre-pandemic highs. So why do growth investors feel like they’re still grinding through a bear market? Because, since the first COVID-19 vaccine was approved in late 2020, growth investors, including our shareholders, have been feeling the pain of a relative bear market induced by central banks’ aggressive interest rate hikes, in which growth stocks generally have been trounced by value stocks. This is especially true for non-US stocks: the MSCI ACWI ex US Value Index has outpaced its Growth counterpart by more than thirty-five percentage points of cumulative return over the last three years.

We lived through a similarly inhospitable period for shares of high-quality, fast-growing companies nearly 20 years ago, when global markets were recovering from the dot-com bust-caused recession of 2001–02. We believe that the challenges of the current period will pass, and the fundamental merits of the growth companies we favor will regain the appreciation of investors at large. But if we’ve learned anything over our thirty-plus years in this business, it’s that we should regularly re-examine our beliefs. What if past is not prologue? Is it possible that this time will be different?

The steady decline in global interest rates that began 40 years ago appears to have ended, the underlying forces having run out of steam. The integration into the world economy of a vast pool of cheap labor from emerging markets, particularly China, suppressed global wage increases; facilitated by freer trade and loosening capital flows, we do not expect to recur. Within affluent societies,

in parallel with heightened spending on strategic security objectives such as re-shoring semiconductor manufacturing and extending military aid to Ukraine, among other nations.

Looking ahead, these trends portend a more challenging environment for corporate growth and profitability. In our view, it favors shares of financially strong companies capable of funding operational needs and growth initiatives from their own cash flows. We expect that firms with adroit and ambitious management will see and seize opportunities to capitalize on the struggles of their financially insecure rivals, sometimes by acquiring them. Businesses in the strongest competitive positions will deliver more robust

Portfolio Management Team

		Peter Baughan, CFA Co-Lead Portfolio Manager   Jingyi Li Co-Lead Portfolio Manager   Scott Crawshaw Portfolio Manager   Christopher Mack, CFA Portfolio Manager   Richard Schmidt, CFA Portfolio Manager   Moon Surana, CFA Portfolio Manager

Performance Summary

For the Global Equity Portfolio, the Investor Class rose 9.87%, the Institutional Class rose 10.08%, and the Institutional Class Z rose 10.17% (net of fees and expenses) in the fiscal year ended October 31, 2023. The Portfolio’s benchmark, the MSCI All Country World Index, rose 10.50% (net of source taxes).

Market Review

Global markets rose for the fiscal year as the increasingly positive outlook for inflation indicators and excitement around technology-related developments overcame stresses among some large US and European banks and continued rate increases by most central banks.

Inflation generally declined throughout the 12-month period; the US Consumer Price Index increase of 4% year over year in May 2023, for instance, was its smallest rise in two years. Central bankers signaled that the fight against inflation was far from over, however. The Federal Reserve and the European Central Bank (ECB), after raising rates to 5.5% and 4%, respectively, used their September 2023 meeting communications to stress that rates, although not rising further in the short term, might stay high for longer than anticipated to bring inflation back to target.

Concerns about the strength of the banking system briefly rose to the fore in early 2023. In the US, Silicon Valley Bank (SVB), the go-to repository for venture capital firms

increased salience of AI, significantly exceeding the returns from more-staid sectors such as Consumer Staples and Health Care. Real Estate was the worst-performing sector, dragged down by the crisis among China’s property developers.

Most regions were positive for the period; the eurozone’s gains in the first half of the fiscal year, stemming from a milder-than-expected winter that averted a potential energy crisis, resulted in it being the strongest overall region, delivering almost double the index returns. Japanese equities also rallied strongly in response to the Bank of Japan’s relatively easy monetary policy throughout the period. Pacific ex-Japan and the US underperformed the index.

By style, shares of the fastest-growing and highest-quality companies outperformed the index.

Performance Attribution

The Portfolio modestly trailed the index for the fiscal year. Poor stocks in Financials, including SVB Financial, were by far the largest detractors in the period. This was mostly offset by good stocks in Communication Services, IT, Health Care, and Consumer Staples.

In Financials, as discussed in our semi-annual commentary, we held SVB Financial, parent company of SVB, for more than a decade, believing it to be an excellent business with sound liquidity and competent management who were thoughtful about risk taking. The bank had also successfully weathered past periods of market stress. Ultimately, we underestimated how gravely SVB’s financial strength and flexibility had been diminished by the sudden rise in interest rates or how customers could all at once lose confidence in the bank despite its importance to their industry. The collapse of SVB caused customer panic to spread other regional banks; another California-based institution and long-term Portfolio position, First Republic

Bank, experienced a precipitous drop in the price of its stock. We later sold the position.

Communication Services holding Meta Platforms was a key outperformer as its management team overcame growth challenges that had previously weighed on the company’s stock. Meta also joined other Communication Services and IT holdings such as Adobe, Alphabet, and Broadcom in surging alongside a boom in spending on AI. (While we held strong performers Apple, Microsoft, and NVIDIA as well, we own them at less than the index weight, meaning they did not boost relative returns.)

Holdings in Europe both inside and outside the eurozone detracted. Sweden-based Hexagon revealed, in its second quarter 2023 earnings, a squeeze on profit margins. The company also had an executive reshuffling and the departure of three independent board members, among other developments. We sold the holding. In the Netherlands, shares of payment processing company Adyen fell as the company reported growth in its US digital ecommerce business had slowed significantly and that recent hiring had compressed margins. While disappointed by the recent results, we believe Adyen is right to focus on investing for future growth despite near-term margin compression.

Stock selection in the US was strong; in addition to the tech and tech-adjacent companies listed above, financial exchanges CME Group and Tradeweb gained as rising volatility led to higher trading volumes in bond and commodity markets. The Portfolio’s lack of holdings in Canada was also beneficial.

Perspective and Outlook

As an investor in high-quality, growing businesses, we have always tried to position the Global Equity Portfolio to benefit from secular trends, the kind that transcend economic cycles and are driven by fundamental changes in key areas such as tech. Still, it is incredibly difficult for anyone to predict how such trends will unfold. Furthermore, as seen with the rise of the internet and, later, mobile connectivity, technology is merely a platform; it’s the applications of the technology that eventually determine many of the winners and losers. In the case of generative AI, some of the future applications may not yet be conceivable, although many companies, even outside the tech field, are now pondering the possibilities.

ChatGPT, the chatbot that helped spark the market’s AI enthusiasm, demonstrates the advances that have been made in AI that open the door to a wider set of business uses. Many of the Portfolio’s holdings have been beneficiaries of this enthusiasm. While it is still early, it’s evident that many companies see generative AI as transformative to their businesses and something upon which they can build new

It doesn’t retain personal identifiable information, keeping it private and secure; it employs the latest data in Salesforce’s system, as opposed to the public data usually used to train generic models; and its generative AI capabilities can be integrated with other Salesforce offerings, with the company already having introduced AI-equipped versions of its workplace collaboration and analytics tools. During the period, Salesforce raised the forecast for its operating margin, suggesting that the newly launched products are drawing enough customer interest to more than justify the R&D investment. Kering’s Gucci division is among the early users, incorporating Salesforce’s AI tools into its call centers.

The beneficiaries of demand for generative AI aren’t limited to traditional IT-sector companies. Data centers used to train AI models require up to ten times more power than typical data centers, thus requiring more-powerful equipment and backup power. Schneider Electric, which has been developing innovative data-center equipment solutions for many years, is one of our non-IT holdings that is well-positioned to benefit from the increased demand for generative AI. EcoStruxure IT, Schneider’s infrastructure-management software, is well positioned to help customers manage these increasingly complex systems, even as the stock’s valuation flies under the market’s AI radar for the time being. Schneider is our largest holding, as we view it as a reasonably valued industrials company that can harness long-term growth opportunities irrespective of an AI revolution.

Our investments are reflective of how we are thinking through the many unknowns and approaching portfolio structure in this environment. Through our fundamental framework, we can appreciate the broad excitement for AI, but we also remain conscious of valuations and thoughtful about diversification, recognizing that it’s unlikely anyone can predict today the biggest long-term winners.

Portfolio Highlights

We exited some of our more expensive holdings during the 12-month period. Notable sales included VAT Group, the Swiss manufacturer of vacuum valves, and two US businesses—online marketplace Etsy and software platform developer The Trade Desk. We also sold UK biotechnology company Abcam after shares soared in reaction to an acquisition offer from Danaher. We redeployed this capital to more reasonably priced stocks.

Our purchases included US drugmaker Repligen, a leading manufacturer of advanced bioprocessing technologies used to make biologic drugs. The company benefits from high switching costs (its products are often difficult to replace once designed into a manufacturing process) and a high recurring revenue stream from its consumable products. The business has recently suffered from customers’

Portfolio Management Team

Edmund Bellord

Portfolio Manager

Moon Surana, CFA

Portfolio Manager

Performance Summary

The Global Equity Research Portfolio Institutional Class rose 7.52% (net of fees and expenses) in the fiscal year ended October 31, 2023. The Portfolio’s benchmark, the MSCI All Country World Index, rose 10.50% (net of source taxes).

Market Review

Global markets rose for the fiscal year as the increasingly positive outlook for inflation indicators and excitement around technology-related developments overcame stresses among some large US and European banks and continued rate increases by most central banks.

In late 2022, investor sentiment was buoyed by indications that US inflation was continuing to decrease from its June 2022 highs, while Europe’s inflation also appeared to peak as the energy supply crisis there eased. The decline in inflation continued through 2023; the US Consumer Price Index increase of 4% year over year in May was its smallest rise in two years. Central bankers signaled that the fight against inflation was far from over, however. In July 2023, the Federal Reserve (Fed) raised the federal funds rate to 5.5%, and in mid-September the European Central Bank (ECB) followed with its own rate hike to 4%, the highest level in its 25-year history, despite lowering its growth forecast for the eurozone. Both the ECB and the Fed used their September meeting communications to stress that rates, although not rising further in the short term, might stay high for longer than anticipated to bring inflation back to target.

Information Technology (IT) and other technology-related sectors such as Communication Services and Consumer Discretionary were the best performers due to the increased salience of AI, significantly exceeding the returns from more-staid sectors such as Consumer Staples and Health Care. Real Estate was the worst-performing sector, dragged down by the crisis among China’s property developers.

Most regions were positive for the period; the eurozone’s gains in the first half of the fiscal year, stemming from a milder-than-expected winter that averted a potential energy crisis, resulted in it being the strongest overall region, delivering almost double the index returns. Japanese equities also rallied strongly in response to the Bank of Japan’s relatively easy monetary policy throughout the period. Pacific ex-Japan and the US underperformed the index.

By style, shares of the fastest-growing and highest-quality companies outperformed the index.

Performance Attribution

The Portfolio trailed the index for the fiscal year. Weak Financials and Information Technology stocks were the largest detractors from relative performance; weak Consumer Discretionary stocks also hurt. Strong Consumer Staples stocks and the Portfolio’s underweight in Energy helped.

As we discussed in our semi-annual commentary, we held SVB Financial, parent company of SVB, for more than a decade, believing it to be an excellent business with sound liquidity and competent management who were thoughtful about risk taking while leaning into a fruitful niche focused on the “innovation economy” of venture capitalists and their portfolio companies. The bank had also successfully weathered past periods of market stress. Ultimately, we underestimated how gravely SVB’s financial strength and flexibility had been diminished by the sudden rise in interest rates or how customers could all at once lose confidence in the bank despite its importance to their industry. The

Perspective and Outlook

As an investor in high-quality, growing businesses, we have always tried to position the Global Equity Research Portfolio to benefit from secular trends, the kind that transcend economic cycles and are driven by fundamental changes in key areas such as tech. Still, it is incredibly difficult for anyone to predict how such trends will unfold. Furthermore, as seen with the rise of the internet and, later, mobile connectivity, technology is merely a platform; it’s the applications of the technology that eventually determine many of the winners and losers. In the case of generative AI, some of the future applications may not yet be conceivable, although many companies, even outside the tech field, are now pondering the possibilities.

ChatGPT, the chatbot that helped spark the market’s AI enthusiasm, demonstrates the advances that have been made in AI that open the door to a wider set of business uses. Many of the Portfolio’s holdings have been beneficiaries of this enthusiasm. While it is still early, it’s evident that many companies see generative AI as transformative to their businesses and something upon which they can build new revenue models. Additionally, they are turning to AI to boost internal productivity, enhance existing customer offerings, and improve the quality and efficiency of customer interactions.

Most notably, Microsoft was able to gain an immediate leadership position in generative AI by making a US$10 billion investment in OpenAI, the company behind ChatGPT, earlier this year. Microsoft’s Bing search engine has since introduced ChatGPT into its web index data—the second largest such data collection in the world. An AI-enhanced search engine trained on this amount of data may attract more users to Bing, allowing Microsoft to sell more ads on the service. Microsoft is also adding generative AI to other products, including the Azure cloud service, enabling business customers who use Azure to glean more insights from their data and automate functions such as certain IT tasks. These added capabilities should motivate more businesses to migrate their data to the cloud and make Azure more competitive with Amazon.com’s AWS and Google Cloud.

Salesforce, a company we’ve owned since 2016, recently added ChatGPT-like capabilities onto its existing AI module, Einstein; Einstein GPT can help generate marketing emails tailored to specific clients by using Salesforce’s customer database and past email correspondences to learn the most effective approach for each client. Einstein GPT is also different from off-the-shelf LLMs in three important ways: It doesn’t retain personal identifiable information, keeping it private and secure; it employs the latest data in Salesforce’s system, as opposed to the public data usually used to train generic models; and its generative AI capabilities can be integrated with other Salesforce offerings, with the

structure in this environment. Through our fundamental framework, we can appreciate the broad excitement for AI, but we also remain conscious of valuations and thoughtful about diversification, recognizing that it’s unlikely anyone can predict today the biggest long-term winners.

Portfolio Highlights

The Global Equity Research Portfolio’s holdings flow directly from our analysts’ buy recommendations among Harding Loevner’s universe of researched companies. We ended the period with 291 holdings in the Portfolio. Over the fiscal year, there was a notable increase in our Energy sector exposure while our Industrial sector holdings declined the most. Regionally, our exposure to Emerging Markets fell due to relative underperformance, while our weight in the US saw a decline driven by portfolio adjustments. In contrast, our exposure to Japan increased, spurred by investment decisions.

In the Energy sector we purchased shares in Tenaris, a global leader in pipe production for the energy industry. Tenaris boasts a distinctive and unmatched manufacturing network, advanced product technology, and extensive global service capabilities, ensuring exceptional resiliency to economic cycles. Its unique direct sales approach to upstream oil & gas companies sets it apart from competitors who largely depend on distributors. We also added to our holding of Neste.

We sold several Industrials holdings due to valuation concerns following stock price appreciation. These included Copart, Roper, SMC, Ryanair, VAT group, Atlas Copco, and Spirax-Sarco. We sold Intrum Justitia due to its deteriorating financial strength, marked by management contradicting its previous commitment to not increase leverage.

In Japan, we capitalized on more attractive valuations following stock price drops, purchasing shares in Santen and Lasertec and increasing our holdings of Daifuku and Shionogi. A notable acquisition was Sony, a leading Japanese conglomerate operating across seven key divisions: electronics, technology and systems, financial services, movies and entertainment, music, image sensors, and gaming. The gaming division, which accounts for the

Portfolio Management Team
		Ferrill Roll, CFA Co-Lead Portfolio Manager   Andrew West, CFA Co-Lead Portfolio Manager   Maria Lernerman, CFA Portfolio Manager   Bryan Lloyd, CFA Portfolio Manager   Babatunde Ojo, CFA Portfolio Manager   Patrick Todd, CFA Portfolio Manager

Performance Summary

For the International Equity Portfolio, the Investor Class rose 10.85%, the Institutional Class rose 11.22%, and the Institutional Class Z rose 11.32% (net of fees and expenses) in the fiscal year ended October 31, 2023. The Portfolio’s benchmark, the MSCI All Country World ex US Index, rose 12.07% (net of source taxes).

Market Review

The period began with stocks rebounding as inflation in both the US and Europe showed signs of subsiding and central banks slowed the pace of their rate increases. In December, the US Federal Reserve (Fed) boosted its short-term borrowing rate by 50 basis points (bps)—a slower pace than the four prior jumbo 75 bp increases. The Bank of England, Swiss National Bank, and European Central Bank (ECB) all followed suit with similarly attenuated rate hikes. The messaging on monetary policy, however, remained resolutely hawkish as central bankers signaled that the fight against inflation was far from over by raising their estimates for terminal rates.

The rebound in stocks accelerated into the new calendar year, but by March, optimism turned to caution due to the dramatic and sudden failure of Silicon Valley Bank, the go-to repository for venture capital firms and their investee companies. The failure marked the second-largest bank collapse in US history by assets, after Washington

Sweden’s Riksbank hiked in September. The ECB followed in mid-September with its own rate hike to 4%, the highest level in its 25-year history, despite lowering its growth forecast for the eurozone. Both the ECB and the Fed used their September meeting communications to stress that rates, although not going higher in the short term, might stay high for longer than anticipated to bring inflation back to target. Bond investors reacted negatively and sold longer-maturity bonds heavily. Equities sold off heavily—declining for the last three months of the period—as investors grappled with the prospect of higher-for-longer rates and a new war in the Middle East between Israel and Hamas.

Information Technology (IT) was the strongest performing sector, led by rebounding semiconductor stocks and boosted by the promise of AI. Consumer Discretionary, Financials, and Industrials outperformed as well. Real Estate was the worst performing sector as companies struggled with high debt levels, rising financing costs, and weakening economic conditions. Health Care, Consumer Staples, and Materials also lagged.

All major regions except Canada were positive for the period. The eurozone and Japan performed the best, with Japanese equities rallying strongly in response to the Bank of Japan’s still-easy monetary policy; however, the gains were reduced for overseas investors by weakness in the yen. Canada, Pacific ex Japan, and Emerging Markets (EMs) lagged; the latter two regions were dragged down by Hong Kong and China, which continued to grapple with its faltering recovery and troubled property sector.

By style, both the highest-quality and fastest-growing stocks faced headwinds, underperforming both the benchmark and their lowest-quality and slowest-growing peers. By value, shares of the least-expensive stocks significantly outperformed.

Performance Attribution

The Portfolio modestly underperformed during the period.

By sector, poor stocks in Health Care, IT, and Consumer Discretionary detracted. In Health Care, Swiss biotechnology company Lonza continued to see slowing demand for its drug manufacturing services, and shares fell further on the announcement that the board had fired the CEO. Additionally, Swiss diagnostic equipment and pharmaceutical manufacturer Roche fell on news that the company’s Alzheimer’s antibody drug failed to meet its objective in clinical trials of slowing cognitive decline. In IT, shares of Chinese solar equipment manufacturer LONGi plummeted due to concern that heavy investments by its competitors will result in overcapacity for the industry. In Consumer Discretionary, global luxury group Kering shuffled the management of its fashion houses, including replacing the CEO of the underperforming Gucci brand with an interim head. The market wished for a clearer succession, as well as better reviews of its September Paris fashion show.

Strong stocks in Consumer Staples and Materials contributed the most to relative performance. In the former, shares of Mexico-based Coke bottler and convenience store operator FEMSA rallied after it announced a strategic review, which will refocus the company on its strongest businesses and divest non-core assets, punctuated by cutting its large stake in Heineken. In Materials, Australian miner BHP experienced strong share price appreciation in the beginning of the period, spurred in part by the anticipated benefits of China’s re-opening from COVID-19.

Regionally, poor stocks in Europe outside the eurozone and Japan detracted. In the former, in addition to Lonza and Roche, shares of Danish pharmaceutical manufacturer Genmab fell on market concerns about higher costs in 2024 and questions about a future iteration of Darzalex, the company’s multiple myeloma drug developed with Johnson & Johnson. In Japan, shares of healthcare company Sysmex suffered from negative sentiment tied to China’s faltering economy; the company derives a significant portion of its revenues from China. Strong stocks in Pacific ex Japan (BHP) and Canada contributed. Canadian gas station convenience store operator Couche-Tard reported strong quarterly and full-year 2023 performance, with growth in merchandise sales, merchandise margins, and US fuel margins offsetting falling fuel sales and weaker fuel margins in Europe.

Perspective and Outlook

Once viewed with widespread awe, China’s economic potency is now being viewed with increasing skepticism.

its commitment to research and development, fostering an environment conducive to groundbreaking inventions. Its leadership in electric vehicles and renewable energy infrastructure signifies its capacity to adapt to and dominate emerging industries. These strengths could play a pivotal role in rejuvenating China’s economic vitality.

We claim no expertise in macroeconomic forecasting, but rather, delve into this debate primarily for context and understanding rather than predictive utility. Our extensive experience investing in Japan has taught us that even if China enters a period of subdued economic growth, it’s essential to separate the prospects of individual companies from the country’s overall macroeconomic outlook. Slow-growing economies can still harbor sectors or niches that are dynamic and prosperous. Companies that pioneer new products, penetrate new markets, or simply consolidate their industry can find avenues for growth that are largely independent of broader economic trends. As China navigates its economic and demographic challenges, we’re scrutinizing potential investment opportunities that could flourish.

Portfolio Highlights

Given that China accounted for 18% of global GDP in 2022—a substantial increase from 10% in 2006, and 5% in 1994—and is both a crucial link in global supply chains and a growing source of end consumer demand, it’s virtually impossible to avoid investment ties to China, whether directly or indirectly.

We have no direct exposure to the Chinese property market, the main locus of current concern, but that does not mean our holdings are immune to the ups and downs of the Chinese economy. Nevertheless, we believe our holdings have a diverse set of growth drivers that should sustain their expansion well beyond headline growth rates in the foreseeable future. Despite the overall slowdown in China’s economy, five of our six Chinese holdings are experiencing robust sales and earnings growth. ENN Energy is the exception, forecasting a slight 5% earnings dip this year with growth expected to resume next year. Three of our Chinese holdings—Ping An Insurance, natural gas utility ENN Energy, and online games and social media platform provider Tencent—are primarily focused on the domestic Chinese market, garnering the lion’s share of their sales locally. On the other hand, home appliance maker Haier Smart Home, solar energy equipment manufacturer LONGi, and thermal management components maker Sanhua Intelligent Controls generate roughly half of their sales outside of China, insulating them partially from domestic woes.

Concerns over China’s economy have also impacted some of our poorly performing Japanese stocks, especially

Portfolio Management Team
		Ferrill Roll, CFA Intl. Co-Lead Portfolio Manager   Andrew West, CFA Intl. Co-Lead Portfolio Manager   Patrick Todd, CFA Intl. Dev. Mkts. Portfolio Manager   Maria Lernerman, CFA Portfolio Manager   Bryan Lloyd, CFA Portfolio Manager   Babatunde Ojo, CFA Portfolio Manager

Performance Summary

For the International Developed Markets Equity Portfolio, the Institutional Class rose 9.64% (net of fees and expenses) in the fiscal year ended October 31, 2023. The Portfolio’s benchmark, the MSCI World ex US Index, rose 12.56% (net of source taxes).

Market Review

The period began with stocks rebounding as inflation in both the US and Europe showed signs of subsiding and central banks slowed the pace of their rate increases. In December, the US Federal Reserve (Fed) boosted its short-term borrowing rate by 50 basis points—a slower pace than the four prior jumbo 75 basis point increases. The Bank of England, Swiss National Bank, and European Central Bank (ECB) all followed suit with similarly attenuated rate hikes. The messaging on monetary policy, however, remained resolutely hawkish as central bankers signaled that the fight against inflation was far from over by raising their estimates for terminal rates.

The rebound in stocks accelerated into the new calendar year, but by March, optimism turned to caution due to the dramatic and sudden failure of Silicon Valley Bank, the go-to repository for venture capital firms and their investee companies. The failure marked the second-largest bank collapse in US history by assets, after Washington Mutual in 2008, which folded in the depths of the global financial crisis. Depositors fled regional banks for the presumed safety of larger institutions. A surge in borrowing from the Fed’s discount window—a crucial lending facility for

followed in mid-September with its own rate hike to 4%, the highest level in its 25-year history, despite lowering its growth forecast for the eurozone. Both the ECB and the Fed used their September meeting communications to stress that rates, although not going higher in the short term, might stay high for longer than anticipated to bring inflation back to target. Bond investors reacted negatively and sold longer-maturity bonds heavily. Equities sold off heavily—declining for the last three months of the period—as investors grappled with the prospect of higher-for-longer rates, rising bond yields, and a new war in the Middle East between Israel and Hamas.

Information Technology (IT) was the strongest performing sector, led by rebounding semiconductor stocks and boosted by the promise of AI. Consumer Discretionary, Financials, and Industrials outperformed as well. Real Estate was the worst performing sector as companies struggled with high debt levels, rising financing costs, and weakening economic conditions. Health Care, Consumer Staples, and Communication Services also lagged.

All major regions except Canada were positive for the period. The eurozone and Japan performed the best, with Japanese equities rallying strongly in response to the Bank of Japan’s still-easy monetary policy; however, the gains were reduced for overseas investors by weakness in the yen. Canada and Pacific ex Japan lagged; in the latter, Hong Kong equities underperformed as China continued to grapple with its faltering recovery and troubled property sector.

By style, both the highest-quality and fastest-growing stocks faced headwinds, underperforming both the benchmark and their lowest-quality and slowest-growing peers. By value, shares of the least-expensive stocks significantly outperformed.

Performance Attribution

The Portfolio underperformed during the period.

By sector, poor stocks in Health Care and Consumer

Regionally, poor stocks in Europe outside the eurozone and Japan detracted. In the former, in addition to Lonza and Roche, shares of Danish pharmaceutical manufacturer Genmab fell on market concerns about higher costs in 2024 and questions about a future iteration of Darzalex, the company’s multiple myeloma drug developed with Johnson & Johnson. In Japan, shares of healthcare company Sysmex suffered from negative sentiment tied to China’s faltering economy; the company derives a sizable portion of its revenues from China. Strong stocks in Pacific ex Japan (BHP) and Canada contributed. Canadian gas station convenience store operator Couche-Tard reported strong quarterly and full-year 2023 performance, with growth in merchandise sales, merchandise margins, and US fuel margins offsetting falling fuel sales and weaker fuel margins in Europe.

Perspective and Outlook

Once viewed with widespread awe, China’s economic potency is now being viewed with increasing skepticism. A primary cause of the economy’s sluggishness—the unfolding slow-motion crisis in China’s property market—has inevitably drawn comparisons to Japan’s prolonged

Portfolio Positioning (% Weight) at October 31, 2023

“Benchmark”: MSCI World ex US Index. “Frontier Markets”: Includes countries with less-developed markets outside the index.

“Other”: Includes companies classified in countries outside the index.

our holdings are immune to the ups and downs of the Chinese economy. Nevertheless, we believe our holdings have a diverse set of growth drivers that should sustain their expansion well beyond headline growth rates in the foreseeable future. Despite the overall slowdown in China’s economy, all three of our Chinese holdings are experiencing robust sales and earnings growth. Home appliance maker Haier Smart Home, solar energy equipment manufacturer LONGi, and thermal management components maker Sanhua Intelligent Controls generate roughly half of their sales outside of China, insulating them partially from domestic woes.

Concerns over China’s economy have also impacted some of our poorly performing Japanese stocks, especially those with exposure to China. However, on average, our 12 Japanese holdings derive only 13% of their sales from China—a surprisingly low figure given China’s economic significance and geographical proximity to Japan. Three of these Japanese companies have over 20% sales to China, a market that has propelled their growth over the past decade.

Among our other holdings, mining giants BHP and Rio Tinto have the highest exposure to China, with approximately over 50% of their global revenue tied to China. These companies both benefit from low-cost and high-grade open-pit mines in Australia, facilitating inexpensive sea shipments to China, the world’s leading steel producer by volume. Because a substantial portion of this Chinese steel is used in construction, including residential projects, both mining companies are indirectly exposed to China’s real estate sector. Despite these concerns, China’s steel output has actually increased in 2023, keeping iron ore prices resilient at over US$100 per ton.

Our divestment from agricultural machinery manufacturer Kubota wasn’t motivated by its limited exposure to China. Instead, our concern centered around its largest market: the United States. We observed indications of declining demand

Portfolio Management Team
		Ferrill Roll, CFA Intl. Co-Lead Portfolio Manager   Andrew West, CFA Intl. Co-Lead Portfolio Manager   Maria Lernerman, CFA Intl. Carbon Transition Portfolio Manager   Bryan Lloyd, CFA Portfolio Manager   Babatunde Ojo, CFA Portfolio Manager   Patrick Todd, CFA Portfolio Manager

Performance Summary

For the International Carbon Transition Equity Portfolio, the Institutional Class declined 1.70% (net of fees and expenses) since its inception on December 21, 2022. The Portfolio’s benchmark, the MSCI All Country World ex US Index, rose 0.68% (net of source taxes) over the same time period.

Market Review

The period began with a continued rebound in stocks, but by March, optimism turned to caution due to the dramatic and sudden failure of Silicon Valley Bank (SVB), the go-to repository for venture capital firms and their investee companies. The failure marked the second-largest bank collapse in US history by assets, after Washington Mutual in 2008, which folded in the depths of the global financial crisis. Depositors fled regional banks for the presumed safety of larger institutions. A surge in borrowing from the US Federal Reserve’s (Fed) discount window—a crucial lending facility for short-term liquidity requirements—prompted the Fed to fashion a new collateralized borrowing program allowing banks to pledge securities at face value rather than market value to plug the holes in their balance sheets. As the crisis escalated, the central banks of the US, Canada, UK, Japan, Europe, and Switzerland took coordinated action to improve US dollar liquidity and ease global funding markets. The run spooked depositors beyond US shores, with Swiss banking regulators forced to intervene by ramming through an

heavily. Equities sold off heavily—declining for the last three months of the period—as investors grappled with the prospect of higher-for-longer rates, rising bond yields, and a new war in the Middle East between Israel and Hamas.

Information Technology (IT) was the strongest performing sector, led by rebounding semiconductor stocks and boosted by the promise of AI. Consumer Discretionary, Financials, and Industrials outperformed as well. Real Estate was the worst performing sector as companies struggled with high debt levels, rising financing costs, and weakening economic conditions. Health Care, Consumer Staples, and Materials also lagged.

By region, Europe both inside and outside the eurozone and Japan performed the best, with Japanese equities rallying strongly in response to the Bank of Japan’s still-easy monetary policy; however, the gains were reduced for overseas investors by weakness in the yen. Canada, Pacific ex Japan, and Emerging Markets (EMs) all fell; the latter two regions were dragged down by Hong Kong and China, which continued to grapple with its faltering recovery and troubled property sector.

By style, quality was a slight tailwind as the highest-quality stocks outperformed both the benchmark and their lowest-quality peers. Growth was a strong headwind, with the fastest-growing companies significantly underperforming. By value, shares of the least-expensive stocks significantly outperformed.

Performance and Attribution

The Portfolio underperformed during the period.

By sector, poor stocks in Health Care, IT, and Consumer Discretionary detracted. In Health Care, Chinese drugmaker CSPC Pharmaceutical reported weak fourth quarter 2022 sales due to price cuts of its key oncology products and the pandemic impact. Additionally, Danish pharmaceutical manufacturer Genmab fell on market concerns about higher costs in 2024 and questions about a future iteration of Darzalex, the company’s multiple myeloma drug developed

estate bubble in the late 80s. Like Japan of yesteryear, China faces a long rise in property prices to levels disconnected to their use or rental value, fueled by debt and unattractive alternatives as a store of value. There is also the inescapable parallel between the two countries’ rapidly aging populations. While Japan began to experience a population decline nearly two decades into its economic stagnation, China’s population contracted last year for the first time since the policy-induced famine of the Great Leap Forward sixty years ago. The aging and shrinking population will put pressure on the total size of the labor force, thereby hampering overall productivity.

However, China boasts an impressive set of economic assets that could enable it to navigate these challenges. Its massive domestic market and significant sway over diverse global supply chains endow it with considerable influence on global prices and product availability. The annual graduation of over a million engineers speaks to its vast human capital and potential for technological innovation. The world’s busiest patent office underscores its commitment to research and development, fostering an environment conducive to groundbreaking inventions. Its leadership in electric vehicles and renewable energy

Portfolio Positioning (% Weight) at October 31, 2023

“Benchmark”: MSCI All Country World ex US Index. “Frontier Markets”: Includes countries with less-developed markets outside the index. “Other”: Includes companies classified in countries outside the index.

past decade.

Our decision to divest from Chinese drugmaker CSPC Pharmaceutical wasn’t primarily influenced by the broader Chinese economic landscape. Rather, we grew increasingly skeptical about the company’s growth potential and margin outlook. We’ve noted that regulatory pressures are squeezing drug prices, and a more stringent approval process is lowering the expected profitability of upcoming drugs. Additionally, the impending patent expiration for CSPC’s flagship drug is set to introduce further pricing pressures from generic alternatives.

Similarly, our divestment from agricultural machinery manufacturer Kubota wasn’t motivated by its limited exposure to China. Instead, our concern centered around its largest market: the United States. We observed indications of declining demand for Kubota’s compact construction equipment, used largely by households, as well as an unusually high inventory for its small residential tractors. These factors collectively signaled a potential slowdown in growth in the US market, coinciding with the company’s push to expand in larger machinery categories there—a combination that could hurt profitability.

Our newest holding, ASSA ABLOY, generates just 3% of its global revenue in China, even though it is the industry leader in a roughly US$50 billion global access solutions

Portfolio Management Team

Edmund Bellord

Portfolio Manager

Moon Surana, CFA

Portfolio Manager

Performance Summary

For the International Equity Research Portfolio, the Institutional Class rose 7.98% (net of fees and expenses) in the fiscal year ended October 31, 2023. The Portfolio’s benchmark, the MSCI All Country World ex US Index, rose 12.07% (net of source taxes).

Market Review

The period began with stocks rebounding as inflation in both the US and Europe showed signs of subsiding and central banks slowed the pace of their rate increases. In December, the US Federal Reserve (Fed) boosted its short-term borrowing rate by 50 basis points—a slower pace than the four prior jumbo 75 basis point increases. The Bank of England, Swiss National Bank, and European Central Bank (ECB) all followed suit with similarly attenuated rate hikes. The messaging on monetary policy, however, remained resolutely hawkish as central bankers signaled that the fight against inflation was far from over by raising their estimates for terminal rates.

The rebound in stocks accelerated into the new calendar year, but by March, optimism turned to caution due to the dramatic and sudden failure of Silicon Valley Bank (SVB), the go-to repository for venture capital firms and their investee companies. The failure marked the second-largest bank collapse in US history by assets, after Washington Mutual in 2008, which folded in the depths of the global financial crisis. Depositors fled regional banks for the presumed safety of larger institutions. A surge in borrowing from

followed in mid-September with its own rate hike to 4%, the highest level in its 25-year history, despite lowering its growth forecast for the eurozone. Both the ECB and the Fed used their September meeting communications to stress that rates, although not going higher in the short term, might stay high for longer than anticipated to bring inflation back to target. Bond investors reacted negatively and sold longer-maturity bonds heavily. Equities sold off heavily—declining for the last three months of the period—as investors grappled with the prospect of higher-for-longer rates, rising bond yields, and a new war in the Middle East between Israel and Hamas.

Information Technology (IT) was the strongest performing sector, led by rebounding semiconductor stocks and boosted by the promise of AI. Consumer Discretionary, Financials, and Industrials outperformed as well. Real Estate was the worst performing sector as companies grappled with high debt levels, rising financing costs, and weakening economic conditions. Health Care, Consumer Staples, and Materials also lagged.

All major regions except Canada were positive for the period. The eurozone and Japan performed the best, with Japanese equities rallying strongly in response to the Bank of Japan’s still-easy monetary policy; however, the gains were reduced for overseas investors by weakness in the yen. Canada, Pacific ex Japan, and Emerging Markets (EMs) lagged; the latter two regions were dragged down by Hong Kong and China, which continued to grapple with its faltering recovery and troubled property sector.

By style, both the highest-quality and fastest-growing stocks faced headwinds, underperforming both the benchmark and their lowest-quality and slowest-growing peers. By value, shares of the least-expensive stocks significantly outperformed.

Performance Attribution

The Portfolio underperformed during the period.

By sector, poor stocks in Consumer Discretionary, Health

prices while keeping sales volumes stable. In Financials, Spanish bank BBVA posted its best year-over-year earnings growth in its history for 2022, driven by increases in revenue and lending growth. The bank also issued positive future revenue guidance and an increase in its cash dividend for 2023.

Regionally, poor stocks in EMs and Japan detracted. In EMs, Chinese producer of electrolyte and lithium salts used in battery production Guangzhou Tinci Materials detracted as it reported a year-over-year decline in earnings due to falling prices for its goods. In Japan, supplier of manufacturing components MISUMI Group highlighted increasing competition in its largest overseas market, China, where local rivals have emerged amid US-China trade tensions. Concerns about the strength of the Chinese economy also weighed on its stock price.

Perspective and Outlook

Once viewed with widespread awe, China’s economic potency is now being viewed with increasing skepticism. A primary cause of the economy’s sluggishness—the unfolding slow-motion crisis in China’s property market—has inevitably drawn comparisons to Japan’s prolonged economic quagmire following the collapse of its own real estate bubble in the late 80s. Like Japan of yesteryear, China faces a long rise in property prices to levels disconnected to their use or rental value, fueled by debt and unattractive alternatives as a store of value. There is also the inescapable parallel between the two countries’ rapidly aging populations. While Japan began to experience a population decline nearly two decades into its economic stagnation, China’s population contracted last year for the first time since the policy-induced famine of the Great Leap Forward sixty years ago. The aging and shrinking population will put pressure on the total size of labor force, thereby hampering overall productivity.

However, China boasts an impressive set of economic assets that could enable it to navigate these challenges. Its massive domestic market and significant sway over diverse global supply chains endow it with considerable influence on global prices and product availability. The annual graduation of over a million engineers speaks to its vast human capital and potential for technological innovation. The world’s busiest patent office underscores its commitment to research and development, fostering an environment conducive to groundbreaking inventions. Its leadership in electric vehicles and renewable energy infrastructure signifies its capacity to adapt to and dominate emerging industries. These strengths could play a pivotal role in rejuvenating China’s economic vitality.

We claim no expertise in macroeconomic forecasting, but rather, delve into this debate primarily for context and

In the IT sector, we capitalized on improved valuations following share price declines and purchased Japanese inspection and measurement equipment manufacturer Lasertec and Chinese cybersecurity company Sangfor. Additionally, we purchased Japan’s Disco, known for its precision tools primarily for the semiconductor industry We also added to several IT holdings including NICE, TSMC, SAP, and Glodon.

We sold several Industrials holdings due to concerns around valuation after stock price appreciation, among them were SMC, Ryanair, VAT Group, Atlas Copco, and Spirax-Sarco. We also sold Intrum Justitia because of deteriorating financial strength.

In Europe outside the eurozone, we exited positions in Lonza, VAT, Atlas Copco, Coca-Cola HSBC, Spirax-Sarco, and Standard Chartered. The latter was sold due to its prolonged struggle with low profitability, offering a limited margin of safety given its challenging financial condition. We also sold Christian Hansen, Dechra Pharmaceuticals, and Abcam following takeover bids that led to significant stock price increases.

A notable acquisition was Sony, a leading Japanese conglomerate operating across six key divisions: Electronics, Technology and Systems, Financial Services, Movies and Entertainment, Gaming, Music, and Image Sensors—the latter three of which are central to Sony’s

Portfolio Management Team

Jafar Rizvi, CFA

Co-Lead Portfolio Manager

Anix Vyas, CFA

Co-Lead Portfolio Manager

Performance Summary

For the International Small Companies Portfolio, the Investor Class rose 4.35%, the Institutional Class rose 4.51%, and the Institutional Class Z rose 4.64% (net of fees and expenses) in the fiscal year ended October 31, 2023. The Portfolio’s benchmark, the MSCI All Country World ex US Small Cap Index, rose 8.82% (net of source taxes).

Market Review

International small capitalization stocks gained in the fiscal year, buoyed by the increasingly positive outlook around inflation and a surge in enthusiasm for the prospects of artificial intelligence (AI). Most sectors and regions rose.

Market optimism at the beginning of the fiscal year turned to caution in March, after the collapse of three US specialty banks. As the crisis escalated, the central banks of the US, Canada, England, Europe, Japan, and Switzerland took coordinated action to improve US dollar liquidity and ease global funding markets. Swiss banking regulators were also forced to ram through a controversial merger between UBS and its troubled rival Credit Suisse. Despite the bedlam, fueled in no small part by sharp increases in interest rates and the consequent drop in bond values, central bankers continued to hike rates to combat inflation, albeit accompanied by a new, more cautious tone.

Inflation across the world continued to decline through 2023; the US Consumer Price Index increase in June of 3.0% year over year was its smallest rise in two years. After raising rates in July to 5.5%, the US Federal Reserve