2022 Letter to Shareholders

David Loevner, CFA
Chairman and Chief Executive Officer

Ferrill D. Roll, CFA
Chief Investment Officer

Simon Hallett, CFA
Vice Chairman

October 30, 2022

The past year has been a difficult one for investors. The headwinds for high-priced growth stocks transmogrified into a deep bear market across all asset classes except commodities. Our emphasis on high-quality companies has done little, so far this year, to shelter our Portfolios from the ravages of soaring energy prices, tight labor markets, rising interest rates, crumbling Chinese property markets, and fraught geopolitics. The last six months have hinted at the resilience of the businesses and the robustness of the balance sheets of the companies in which we invest, with most of the Portfolios outperforming their benchmarks modestly as anticipation of global recession rises. Small solace indeed. Our portfolio managers and analysts remain focused on reviewing the investment case for each holding and on uncovering bargains made available by the lower prices on offer. You can read about those efforts to respond to the changing landscape in the 2022 Annual Commentary.

Meanwhile, we’ve taken steps to serve the needs of our investors in additional, if more prosaic, ways. Asset owners themselves face new challenges and priorities, and their different return objectives, investment horizons, risk tolerances, and strong views about the best—or worst—sources of future returns can require investment vehicles more narrowly defined than our longstanding offerings. In response, we’ve introduced new Portfolios that attempt to meet those changing investment objectives and specific preferences.

As an example, our Emerging Markets (EM) strategy has exposure limits for each country; two years ago, the limit for China was 35%. With the Chinese market’s outperformance in 2020 due to China’s early containment of COVID-19, some shareholders were dissatisfied with the underweight that constraint produced relative to the EM benchmark. With them in mind, we launched our Chinese Equity Portfolio, which allows investors who favor following our bottom-up approach to identifying high-quality growing companies to deepen and tailor their exposure to the Chinese market as they desire.

This year, we expanded upon that logic by launching a complementary fund, the Emerging Markets ex China Portfolio, as a means for investors to manage their China and EM exposures independently—including the ability to avoid exposure to China altogether if, for instance, they have come to believe that China’s recent regulatory interventions, the scale of its property bubble, or its more aggressive posture toward Taiwan have rendered the market suspect, or even “uninvestable.” We believe these two portfolios, because they share portfolio managers with our Emerging Markets strategy and draw from the opportunity set qualified by our research team, should deliver good risk-adjusted returns over time even though each individual portfolio may prove to be more volatile than their more diversified progenitor, our main Emerging Markets Portfolio.

With emerging markets having generally disappointed in the past few years and been so tumultuous recently, some investors have become disenchanted with the entire market segment. To accommodate that view (which, to be clear, we do not share), we added to Harding, Loevner Funds’ lineup a Portfolio that expressly de-emphasizes emerging markets. The International Developed Markets Equity Portfolio makes broadly accessible a strategy that we’ve managed very successfully for institutional clients for over a decade. This strategy is managed in conjunction with our flagship International Equity strategy by a member of the latter’s portfolio management team.

Strong views abound on fossil fuels and the urgency of the need to lower carbon emissions. The energy crisis triggered by Russia’s invasion of Ukraine has highlighted the world’s unreadiness to do without fossil fuels in the short or even medium term, affording spectacular profits to those able to deliver product to make up the shortfall. The recent high returns to fossil fuel investments have betrayed the wishful thinking that the alignment of investments according to environmental, social, and governance (ESG) criteria would in and of itself lead to superior returns. Regardless, asset owners who wish to help address the looming crisis posed by a rapidly warming climate are undeterred. Because some are asking for restrictions on fossil fuel investments or positive bias toward companies lowering their carbon emissions, we’ve introduced pooled funds that steer heavily toward investments that align with carbon emission reduction goals. Following on the launch earlier this year of a Global Paris-Aligned strategy through our European UCITS fund family, we are set shortly to launch a similarly oriented International Carbon Transition Equity strategy that will be available through Harding, Loevner Funds. Both strategies will exclude companies that our analysts conclude have failed to articulate or commit to a feasible path to net-zero carbon emissions, starting with fossil fuel companies.

Our approach to assessing the risks of regulation and environmental damage and the growth opportunities stemming from climate change has always been to incorporate our analysis into the full panel of investment considerations against which we make financial judgments about companies and their shares. Our approach to assessing the investment risks and opportunities related to China and emerging markets falls along similar lines. And yet we recognize that consideration of material financial risks and opportunities at the company level may be inadequate to the needs of some investors. By offering more customized building blocks, we aim to help meet those needs while still pursuing superior returns and limiting risk to the absolute best of our ability. Each of these new strategies is closely related to an existing strategy and relies on its portfolio managers; therefore, the incremental demands on the investment team are not burdensome. That strikes us as a win-win: to increase opportunities for shareholders to benefit from our core investment insights in whichever configuration they may need, while keeping our investment eyes scouring the landscape for the opportunities—or still-hidden risks—that the difficult environment may expose.

David Loevner
Chairman and Chief Executive Officer

Ferrill D. Roll
Chief Investment Officer

Simon Hallett
Vice Chairman

Investments involve risk and loss is possible.

The Portfolio’s investment objectives, risks, charges and expenses must be read and considered carefully before investing. The statutory and summary prospectuses contain this and other important information about the investment company. They may be obtained by calling toll free (877) 435-8105, or visiting hardingloevnerfunds.com.

The Portfolio is distributed by Quasar Distributors, LLC.