Pzena's International Small Cap Value Strategy Navigates a Tech-Driven Q2 2026 Market

The second quarter of 2026 truly offered a fascinating, if not somewhat concentrated, landscape for international small-cap equities. Macroeconomic uncertainties seemed to ease up a bit, giving a boost to these often-overlooked companies. But let's be honest, the real buzz, the main narrative, was all about artificial intelligence and the soaring demand for semiconductor-related technologies. This, as you might expect, meant growth stocks generally outshone their value counterparts, particularly those connected to the AI boom.

So, how did Pzena's International Small Cap Focused Value portfolio fare in this vibrant, yet perhaps uneven, market? Well, we’re pleased to report that the portfolio largely kept pace with its broad-market benchmark during Q2 2026. What’s more, it actually outperformed its value benchmark, which is always a good sign for our disciplined approach. It’s a testament, we believe, to our rigorous, research-driven process, even when the market has a clear favorite.

Looking a little closer at what drove performance, the materials sector really stepped up, proving to be the largest contributor to the portfolio's positive returns this past quarter. It just goes to show that even when tech gets all the limelight, fundamental value in more traditional sectors can still shine through.

Of course, a dynamic market means making thoughtful adjustments, and Q2 was no exception. We brought a few compelling companies into the fold: Travis Perkins, a key player in housing materials distribution; Ibstock, a manufacturer of essential building products; and Ariston Holding, a specialist in heating and water technology. These additions align perfectly with our long-term value perspective.

On the flip side, we made some difficult, but necessary, decisions to exit certain positions. Ferrexpo, for example, was divested due to some deteriorating governance issues that, frankly, became too significant to ignore. We also exited Aurubis, Barry Callebaut, and Senior, though these were on strength, allowing us to lock in gains. A bit of trimming also occurred with Kanto Denka Kogyo and Tokai Carbon, both specialty chemical and carbon producers, as we reallocated capital towards what we saw as even more compelling opportunities elsewhere. It’s all part of our continuous effort to optimize for long-term potential.

When you step back and look at the broader market, it’s quite striking. The global equity market returns for the first half of 2026 were heavily, almost disproportionately, driven by an earnings boom in semiconductor stocks, all fueled by massive AI capital spending. We're talking about a significant concentration here, impacting both emerging markets and developed market value indices. Consider this: information technology, largely memory and logic chip companies in places like Korea and Taiwan, accounted for a staggering 103% of the MSCI EM Index’s total return year-to-date through June 2026. Korea and Taiwan alone contributed over 113% of EM's gains! It really underscores the narrow breadth of market leadership during this period.

Despite this market concentration, our strategy remains steadfast. We believe in a research-driven, bottom-up approach, focusing intensely on companies priced significantly below their intrinsic, long-term earnings potential. Our objective has always been to generate excess returns over the long haul by investing in undervalued non-U.S. equities, and that discipline is something we don’t waver from. It's about finding those diamonds in the rough, those companies with solid fundamentals that the market might be temporarily overlooking, especially when it's distracted by the latest hot trend.

Our portfolio characteristics reflect this deep value orientation. For instance, our strategy's Price to Normal Earnings stands at 7.1x compared to the Index's 12.5x, and our Price/Earnings (1-Year Forecast) is 12.2x versus the Index's 14.5x. These metrics highlight our commitment to investing in companies with attractive valuations.

It's important to remember, as always, that investing involves risks. Past performance, while informative, doesn't predict future returns, and the value of investments can certainly go down as well as up. Our strategies, being more concentrated and having different sector/regional weights than benchmarks, can lead to more volatile performance. Small-cap and mid-cap companies, by their very nature, carry additional risks like limited liquidity. And, of course, value investing itself comes with the risk that valuations might not improve as quickly as we'd hope, or that returns might not move in lockstep with other styles or the general market. But for us, that long-term conviction in fundamental value remains the cornerstone of our approach.