HLMSX Dropped 4% in Q1 as AI Hit Software Holdings

The naive read holds that international small caps are insulated from the US AI trade. The better market read contradicts that. Artificial intelligence disruption is global. Small software firms in Europe, Asia, and emerging markets face the same obsolescence risk from AI that US names do. Harding Loevner’s benchmark likely benefited from exposure to sectors that gained from AI optimism – semiconductors, industrials, or automation – amplifying the fund’s relative underperformance. The 4.01% loss is a concrete signal that growth premiums are being repriced worldwide, not just in megacap tech.

For HLMSX holders, the Q1 drawdown raises a structural question. Will software valuations keep compressing as large incumbents invest heavily in AI capabilities? Small-cap software firms must demonstrate a clear AI adoption path to regain investor confidence. Until then, factor rotation may continue to penalize growth-heavy strategies.

Next Test: Q2 Fundamentals and Fund Positioning

The immediate decision point comes with Q2 2026 earnings from the fund’s top software positions. If fundamentals remain intact and guidance supports an AI use case, the sell-off may represent a sentiment overshoot. If margins compress or revenue decelerates, further downside is likely. Harding Loevner’s next quarterly commentary and portfolio disclosure will reveal whether the manager rotated out of software or held firm. That disclosure is a critical data point for anyone tracking international small-cap exposure.

The HLMSX performance in Q1 serves as a warning for diversified small-cap strategies. Software concentration can introduce factor risk even in a fund targeting quality and growth. The next catalyst is the fund’s portfolio update and the Q2 earnings results from its holdings.