Market Context and Fund Performance in Q2 2026
The international small-cap equity market staged a notable recovery in the second quarter of 2026. The National International Small-Cap Fund (Institutional Service class) recorded a 9.20% return, modestly surpassing the MSCI EAFE Small-Cap Index, which rose 9.02% over the same period. This performance reflected improved investor risk appetite, solid corporate earnings, and increased infrastructure investments linked to artificial intelligence. The fund saw particularly strong gains from April through May, though momentum slowed in June amid easing concerns due to falling energy prices and thawed geopolitical tensions between China, the US, and Iran, which helped alleviate worries over high valuations and inflation pressures. The technology sector led market advances, while industrials and AI-related industries also showed strong results.
Global monetary policy diverged noticeably during the quarter. The European Central Bank and Bank of Japan raised rates in June, whereas the Reserve Bank of Australia paused tightening after its May hike. The Bank of England held rates steady. Economic momentum varied across regions: China experienced sluggish activity; some European and UK areas faced weakening growth; and Asian tech stocks remained volatile. Capital market activity showed signs of resurgence, with a gradual expansion in risk-taking despite persistent economic and policy uncertainties.
Among MSCI EAFE Small-Cap’s 11 sectors, eight posted positive returns. Information technology and materials led performance, while energy and consumer staples lagged.
Key Contributors and Detractors to Fund Returns
The fund’s outperformance largely resulted from select stock picks in the information technology, industrial, and financial sectors, offsetting relative underperformance in materials, utilities, and consumer discretionary sectors.
Notable outperformers included Japan’s Ibiden, Taiwan’s Unimicron Technology from Hsinchu, and Chroma ATE, also based in Taiwan. Ibiden exceeded earnings expectations, benefiting from its strong position supplying high-end carriers for AI accelerators and high-performance server processors. Unimicron maintained solid results buoyed by robust demand for advanced circuit boards in data centers and high-performance computing. Chroma ATE capitalized on growth in semiconductor and electric vehicle testing equipment driven by AI infrastructure expansion and electrification trends.
Underperformers comprised Israel’s cloud web services provider Wix.com, Japan’s materials and electronics firm Taiyo Yuden, and Canada’s gold mining company Lundin Gold. Wix.com faced narrowed Q1 profit forecasts due to increased marketing spending and business restructuring, alongside announcements of workforce reductions and lowered booking volumes.
Portfolio Adjustments and Trading Activity
During the quarter, the fund established new positions in Nomura Real Estate Master Fund, Fukuoka Financial Group, Arcadis NV, Wix.com, and Furukawa Electric Co. Concurrently, it increased weightings in select technology and electronics stocks. Positions in Stockland Trust Group and Katitas Co Ltd were exited, with partial reductions in holdings such as Unimicron Technology and ASPEED Technology.
Broader Economic Factors and Investment Outlook
The current macroeconomic landscape is nuanced by complex, overlapping factors: geopolitical strife in the Middle East and oil price uncertainty; shifts toward inflation-focused monetary policy by the Federal Reserve; and ongoing debates over AI-related capital expenditures. The US economy is supported by AI infrastructure investments and high-end consumption, though growth displays increased fragility. Europe benefits from improved credit conditions and fiscal stimulus but remains constrained by energy dependence and political risks. In Asia, Japan’s wage growth, corporate reforms, and defense spending prospects suggest a recovery trajectory, while China shows uneven economic performance. Policy support and technological advancements provide counterbalance to challenges in consumer demand and exports.
Overall, market dynamics reflect a fragmented pattern rather than a unified economic cycle, with divisions between inflation vs. growth, AI sector winners vs. others, and varying degrees of policy and fiscal support against energy and geopolitical constraints. The fund management team remains focused on identifying structural growth opportunities, maintaining valuation discipline, and executing with precision to navigate market volatility and generate consistent returns.