AEC Commentary (Q1 2026)
April 2026
The first quarter of 2026 has been exceptionally dynamic. Macro volatility has taken hold. During such periods, investor logic becomes simplified and market returns detach from fundamentals. Over the final four weeks of the quarter, the fund swung from +10% to -1.8% YTD as war, currency swings, and oil risk overtook investors' mindset. The uncertainty and inflationary unknowns surrounding the war led to multiple ±4% trading days through March. We closed the quarter on a zag day versus a zig day for our benchmark, and a -1.8% return versus +2.5% for the EEMS ETF. Yet halfway through April, the fund’s YTD return has rebounded to +13.5% versus the EEMS ETF +10.8% YTD.
The chart below displays our track record over short- and long-term periods:
| Periods ended 3/31/2026 | AEC | MSCI EM Small Cap
ETF (EEMS) |
|---|---|---|
| Quarter | -1.80% | 2.53% | 1 Year | 19.35% | 28.41% | 3 Years Annualized | 8.49% | 14.34% | 5 Years Annualized | 6.05% | 6.49% | ITD Annualized (1/1/2018) | 8.94% | 5.90% |
Source: Bloomberg
Data shows past, net-of-fees performance. Past performance is not indicative of future performance and current performance may be lower or higher than the data quoted.
While most markets have seen pressure as inflationary and growth risks emerge, EM investors have reacted by distilling individual economies into a simplified have or have-not framework. The Asian oil importers sans Taiwan (India and Korea) fell significantly, while the Latin American oil exporters showed more resilience. Despite being a 100% energy importer, the impact on Taiwan was muted due to the secular AI trend buoying the market.
Taiwan, as the country benefitting most from AI, has been a consistent topic in relation to our fund and style. Since December 31, 2022 (launch of ChatGPT), our fund has returned 51.7% gross of fees (13.7% CAGR) against 56.1% (14.7% CAGR) for the MSCI EM Small Cap ETF (EEMS), and 58.3% (15.2% CAGR) for the MSCI Emerging Markets ETF (EEM). However, if we exclude Taiwan and redistribute its weight proportionately into the contributions of the remaining countries, our fund returned approximately 56% (14.7% CAGR) versus 43.5% (11.8% CAGR) for EEMS, and 44.2% (11.9% CAGR) for EEM. With 20/20 hindsight, altering our style to adapt to the manic AI-wave may seem like it would have been the right move. Yet we remain disciplined in our process, which has served us and our investors very well over time. As a result, we were underweight Taiwan because fundamentals and valuations were outside of our comfort zone. Instead, we allocated capital to companies where growth and value are more apparent to us. Although essentially all of the fund underperformance and/or all the EEMS outperformance is attributable to Taiwan over the last three years, we have still produced solid results without changing our approach – a gratifying, yet somewhat frustrating, feat given that we trail the benchmark over the period. As we identified a second wave of Taiwanese AI beneficiaries that trade at valuations consistent with our process, our allocation to Taiwan has grown, with the weight remaining at about half the level of the benchmark.
Our stance on tech has never shifted, nor has our overweighting of the sector, which remains about 50% above the benchmark level. Keeping that in mind, neither are we speculators. Taiwan is currently trading 36.5x earnings (as defined by the Cyclically Adjusted Price to Earnings Ratio). While this is a backward-looking assessment, what it means is that Taiwan is more expensive than any other market in the world (relative to the past decade of earnings within the country). Given the disruption, value, and power emerging from AI, this rating comes as no surprise.
However, as we internally frame AI and its “productivity” potential, we cannot ignore that AI success is potentially a double-edged sword. Within conceptual AI productivity optimization there is an inherent risk to the current global operating system – meaning people and jobs. There’s no need to pontificate about the unknown future. Instead, we’ve opted for a barbell approach that rides both tech evolution (rationally) as well as the demands of the people that reside on our planet. What this looks like in practice is an increased weighting in healthcare and basic industries, which we feel offsets associated AI risks. Adjacent to the barbell analogy, the image of Newton’s cradle comes to mind. The pull of AI has shifted the weighting and valuation far up and away from the rest of the sectors. Capital flows have supported this move, but as with all investments, there is a required return which must not be forgotten. The power of AI is without question, but the impact remains a great unknown given that economies require both production and consumption by and for humans. Simply put, with big changes, there always seem to be hiccups along the way.
As the three-year performance breakdown reveals, we continue to generate alpha outside the exclusively AI-driven Taiwan market. From an industry standpoint, the portfolio composition today is ~30% tech, ~20% healthcare, and ~10% each in financials, industrials, and communications services. From a geographic perspective, allocations are roughly 26% India, 19% South Korea, 14% Poland, 9% Brazil, and 8.5% Taiwan.
Two of our top three performers YTD are Indian generics companies Bliss Pharma (BLIS IN) and Kwality Pharma (KWPL IN), up 54% and 30% respectively (while the overall India portion of the benchmark is down 9%). The move in Bliss is supported by a low valuation and additional capacity coming online. Kwality has stellar growth in revenue and margins as they expand sales in Central America, and we assume that the results are finally catching notice from other institutions. On top of the individual strengths of each company, both generate the majority of their revenue in US dollars, which insulates them through a period of rupee weakness.
Our number two contributor is Korea-based S&S Tech (101490 KS), which has returned 92% YTD. Our lack of weight in Taiwan is largely offset with an overweighting of Korea. The Korean stock market has disappointed for nearly two decades, with the Bloomberg Small Cap Index (KRSCNL Index) compounding at a paltry 3.4% (91% total return) from April 2006 to April 2025. As a result, the Korean market attained the “value trap” label. However, over the past year the index has returned 89% – two points below the total return of the prior 19 years. It made no sense to us that Korea, despite holding 60%+ of global memory chip production, lay dormant through the first two years of the AI fever. And though the value trap perception took some time to shake off, we have found great companies in Korea and are now being rewarded for it. We do not see snares to an enduring re-rating of the market, so long as AI remains a focal point.
While five of the remaining top ten performers are Taiwan-based, a number of the positions migrated from a buy to sell within the span of the quarter. MSSCORPS Co Ltd (6830 TT) is a prime example. We purchased the stock 2/6/2026 and it returned 290% over a two-month period. Per our internal estimates, the stock has become very expensive. But this dramatic movement is NOT an anomaly. We’ve seen this time and time again within Taiwan, and are unclear how much rationality versus speculation (momentum trading) is behind such moves. For perspective, when we purchased the stock, it traded on 9x our expected 2026 EBITDA. Today it trades 36x our 2026 EBITDA estimate with no notable changes to outlook. While it is a unique company, the valuation is baking in much more than we expect over the coming years.
Along with Korea, Brazil stands out as a mispriced market. We have found numerous high-quality companies that fit our approach and have been executing through a stifling interest rate environment. Matt was on tour in Brazil in April and returned with conviction in our holdings, new ideas, and a directionally positive outlook on the economy. We are adding weight as a result. We view our positions as attractive from a bottom-up standpoint and consider any domestic macro improvement as additional positive optionality.
The trip reinforced the distinction between statistically cheap and genuinely interesting fundamental businesses. BR Partners (BRBI11 BZ) is a stock that we purchased a few months back. It is a boutique investment bank and the biggest independent player in many of its market niches. It was founded by the former CEO of Goldman Sachs Brazil and, based on our research, is held in very high regard among market participants. Investment banking is typically a highly cyclical business, but BR has built out a diversified franchise across debt capital markets, treasury sales and structuring, and wealth management that has offset softness in Brazilian M&A. Even in a depressed M&A environment, the company has maintained an ROE over 20% and pays a 6.5% dividend yield. When M&A returns, the upside is substantial: once the economy stabilizes, a roughly $30 billion pipeline of offerings is waiting to come to market. BR Partners is a quintessential example of the under-valuation of Brazilian small-caps, trading at 10x current-year earnings versus 13-20x for high-quality US boutique peers.
In Construtora Tenda (TEND3 BZ), a new position we added after the recent visit, we again see a valuation dislocation. Tenda is a leader in Brazil's underserved low-income housing market. Once heavily leveraged, the company has deleveraged sharply and now operates from a much stronger financial footing. The meeting made clear that cost discipline and a more industrialized approach to homebuilding have become a significant competitive edge. The data backs that up: half of Tenda's 4Q25 sales came from the lowest-income and historically lowest-margin tier of the program, yet the company continues to deliver strong margins relative to its peer group – evidence that it is realizing structural cost advantages. Tenda trades at 6x current-year earnings against expected sales and EBITDA growth of roughly 20%.
Quarters like this one are useful reminders of how quickly sentiment can detach from fundamentals, and how little that tends to matter over longer periods. Our job is to stay focused on identifying quality businesses in inefficient markets that we believe will continue to drive their returns higher, and buy at valuations that put risk/reward in favor of our investors. Inefficiency remains a constant in our asset class, and though macro waves cause accentuated distortions, we know that those same waves inevitably create the opportunity we aim to exploit. As always, we appreciate your partnership and welcome any questions.
Sincerely,
Spencer Stewart,
Portfolio Manager,Ark Global Emerging Companies, LP
DEFINITIONS
EBITDA: Earnings Before Interest, Taxes, Depreciation, & Amortization
MSCI EM Small Cap ETF (EEMS): iShares MSCI Emerging Markets Small Cap ETF. The fund generally will invest at least 80% of its assets in the component securities of the underlying index and in investments that have economic characteristics that are substantially identical to the component securities of the underlying index. The index is designed to measure the performance of equity securities of small-capitalization companies in emerging market countries.
ROE: Return on equity is a measure of financial performance calculated by dividing net income by shareholders' equity
The MSCI Emerging Markets Small Cap Index includes small cap representation across 27 Emerging Markets countries. With 1,693 constituents, the index covers approximately 14% of the free float-adjusted market capitalization in each country. The small-cap segment tends to capture more local economic and sector characteristics relative to larger Emerging Markets capitalization segments.
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