In the recent quarter, the global landscape for small-cap equities displayed a generally upward trend, with the portfolio demonstrating a net return of 5.34%. This performance, while positive, lagged behind the broader MSCI World ex USA Small Cap Index, which saw a stronger gain of 7.94% over the same period. The market continued to be significantly influenced by the prevailing excitement surrounding artificial intelligence, shaping both successful investments and areas of underperformance within the portfolio.

International equity markets recorded a positive quarter, with a notable nine out of eleven GICS sectors achieving favorable returns. Financials and information technology sectors were the primary drivers of market growth, highlighting robust activity and investor confidence in these areas. Conversely, the energy and communication services sectors experienced declines, acting as the sole detractors from overall market gains. Geographically, Japan and the Netherlands made significant contributions to market performance, while Hong Kong and Norway saw their markets retract.

The portfolio's performance was bolstered by several key holdings. Jenoptik, a German electronic equipment manufacturer, saw its shares climb due to strong orders in its semiconductor equipment division, benefiting from accelerating demand from lithography and inspection clients and a broader positive momentum in the semiconductor market. Hamamatsu Photonics, a Japanese photonics company, also contributed positively, with its stock price increasing after reporting better-than-expected earnings and significantly raising its full-year guidance, largely driven by strong demand related to semiconductors and the generative AI investment cycle. Additionally, oOh!media, an Australian out-of-home advertising operator, saw its shares rise following an indicative takeover offer from a private equity firm, though the portfolio managers believe the offer undervalues the company.

However, some holdings faced headwinds during the quarter. Valmet, a Finnish pulp and paper technology company, reported soft results amid a challenging market. The European board market's oversupply led to reduced capital expenditure and service demand, impacting Valmet's performance. Despite this, management maintained its guidance, and the long-term thesis for the company remains intact. Lanxess, a German specialty chemicals company, also experienced a decline in share value due to a weak start to the year in a seasonally soft quarter. However, management reaffirmed full-year guidance, and geopolitical events in the Middle East unexpectedly created a tailwind by raising input costs for Asian competitors, allowing Lanxess to implement price increases. Adecco, a Swiss staffing company, saw its shares fall despite healthy top-line growth, primarily due to disappointing margin development and concerns about price competition, which are viewed as temporary.

During this period, several new positions were added to the portfolio. Birkenstock Holding, a German premium footwear company, was initiated due to its strong brand heritage, proprietary materials, and vertically integrated manufacturing model, which are believed to support durable growth and margins despite current market skepticism. Dormakaba, a Swiss manufacturer of access solutions, was added, with new CEO Till Reuter expected to drive operational restructuring and margin improvements. Hiab, a provider of on-road handling equipment, was identified as a high-quality industrial company in an attractive niche market, benefiting from structural demand for logistics efficiency and potential for volume recovery. Reply, an Italian IT services company, was included for its expertise in cybersecurity, cloud migration, and digital transformation, with its decentralized model positioning it to capitalize on AI-driven productivity gains. SATS Ltd., a Singapore-headquartered aviation services company, was added for its leading position in global cargo handling and potential for revenue growth and margin expansion. Lastly, Scout24, a German property classifieds platform, was initiated due to its dominant market position, strong network effects, and proprietary data assets, with perceived risks from AI being overstated.

The quarter's investment landscape was marked by continued investor enthusiasm for artificial intelligence, which significantly influenced market dynamics. In this environment, the portfolio maintained its core investment philosophy of evaluating companies based on their competitive advantages, long-term cash flow potential, and intrinsic value relative to their market valuation, rather than attempting to forecast short-term market trends or identify speculative winners in emerging technological shifts.