Navigating Volatility: A First Quarter of Outperformance

Summary of Q1 2026 Fund Performance

The Virtus KAR Emerging Markets Small-Cap Fund concluded the first quarter of 2026 with a notable return of -0.06% (Class I), demonstrating a slight outperformance compared to its benchmark, the MSCI Emerging Markets Small Cap Index, which recorded a return of -0.74%.

Emerging Markets Small-Cap Equities Overview

The first quarter of 2026 saw emerging markets small-cap equities experience a downturn, finishing just under 1% lower. Despite a robust start to the year, with the MSCI Emerging Markets Small Cap Index climbing over 11% by the close of February, the momentum shifted significantly in March.

Key Contributors to Positive Performance

LEENO Industrial emerged as the leading positive contributor to the fund's performance during the quarter. This Korean manufacturer specializes in highly intricate testing sockets and probes utilized across various semiconductor production stages, including fabrication, assembly, and packaging. The company's strong business results, which surpassed market expectations, were primarily driven by robust demand from memory manufacturers and fabless design companies. Caixa Seguridade also played a significant role, benefiting from its unique distribution partnership with Caixa Econômica Federal and a substantial dividend yield.

Underperforming Holdings and Market Headwinds

Conversely, Avia Avian, an Indonesian paint manufacturer, was a major detractor from the fund's performance. The company faced challenges due to decelerating growth in its primary market, while its expansion into the less affluent eastern Indonesian region proved more difficult than anticipated. Allegro, a leading Polish e-commerce platform, also struggled, as the market reacted negatively to its acquisition of Mall Group. This acquisition, which expanded Allegro's footprint into new European markets, initially raised concerns about its impact on financial performance.

Strategic Geographic Allocation and Market Dynamics

The fund's strategic underweighting of Taiwan, Korea, and India significantly contributed to its outperformance. These markets, which had experienced strong gains earlier in the year due to an AI-driven rally, subsequently underperformed. The fund's reduced exposure to these regions helped mitigate the negative impact of their late-quarter decline.

Sectoral Focus and Investment Strategy

The fund maintains a concentrated portfolio with a significant allocation to the industrial sector. This strategic focus aims to capitalize on growth opportunities within the sector, but also introduces a higher degree of sensitivity to industrial performance compared to a more diversified portfolio.

Outlook and Positioning for Future Growth

Looking ahead, the fund remains committed to its investment philosophy, focusing on high-quality companies with strong fundamentals and sustainable growth prospects within emerging markets. The team will continue to monitor global economic trends and adjust the portfolio strategically to navigate potential headwinds and seize new opportunities for long-term value creation.