In the first quarter of 2026, the global small- and mid-capitalization stock market, as evaluated by the MSCI All Country World Ex USA Small Mid Cap Index, experienced a modest increase of 0.35%. However, the Virtus KAR International Small-Mid Cap Fund faced a significant decline, recording a -6.32% return and thus underperforming its benchmark. This period was characterized by persistent AI-driven market dynamics. Noteworthy events included VAT Group's strong performance, fueled by robust demand in the semiconductor equipment sector, and FinecoBank's underperformance, which was affected by concerns over artificial intelligence's potential competitive impact on human advisory services. The fund strategically expanded its portfolio by investing in three new companies: IntegraFin, a software firm based in the UK; Riverstone, a healthcare enterprise from Singapore; and Steadfast Group, an insurance broker operating in Australasia.

During the first three months of 2026, the international small- and mid-cap equity markets demonstrated a slight upward trend, with the benchmark index showing a 0.35% gain. This growth was largely influenced by the ongoing momentum generated by artificial intelligence advancements. The Virtus KAR International Small-Mid Cap Fund, however, did not participate in this positive movement, posting a negative return of 6.32%. This underperformance highlighted a divergence between the fund's strategy and broader market trends. The market's enthusiasm for AI continued to bolster sectors related to technological innovation.

A notable event within the fund's portfolio was the strong showing of VAT Group. This company, benefiting from the robust demand for semiconductor equipment, saw its shares increase significantly, contributing positively to the fund's holdings despite the overall negative performance. Conversely, FinecoBank experienced a downturn. This was primarily attributed to growing anxieties among investors regarding the potential disruption that AI software could bring to human-led financial advisory services, leading to competitive pressures across the global financial sector.

In a strategic move to adjust and diversify its investments, the Virtus KAR International Small-Mid Cap Fund made several new acquisitions during the quarter. These included IntegraFin, a software company based in the United Kingdom, recognized for its technological solutions in the financial services industry. The fund also invested in Riverstone, a healthcare provider from Singapore, indicating a focus on the burgeoning healthcare sector in Asia. Furthermore, the acquisition of Steadfast Group, an insurance brokerage firm operating in Australasia, demonstrated an interest in expanding its presence in the insurance market in that region.

The first quarter of 2026 presented a mixed landscape for international small- and mid-cap investments. While the overall market saw a modest rise, the Virtus KAR International Small-Mid Cap Fund's considerable underperformance prompts a closer examination of its investment decisions and market exposures. The contrasting fortunes of VAT Group and FinecoBank underscore the dual impact of technological advancements, both as a catalyst for growth and a source of competitive pressure. The new additions to the fund's portfolio reflect an adaptive investment approach, aiming to capitalize on opportunities in diverse sectors and geographical markets.