2026 Midyear Commentary

Bryant VanCronkhite: Today, I’d like to do something a little unusual. I’d like to start with the conclusion. If you forget everything else I say today, I hope you remember this one thing: Our investment philosophy has not changed. Our portfolios will evolve, but the philosophy as to what creates value does not. After all, that conclusion is the reason many of you invested with us in the first place. You've invested alongside us because we believe a few things that have stood the test of time.

We believe that over the long run, ownership and consistently profitable businesses create wealth. We believe that companies that convert those profits into durable cash flow are better positioned to compound value. We believe that businesses with strong balance sheets and financial flexibility have greater control over their own destiny, and we believe that management teams who allocate capital wisely can create enormous value over time. Those principles are not always rewarded immediately. We continue to own businesses that reflect the same investment philosophy that has guided us for years. We continue to emphasize financial strength and disciplined capital allocation.

Those principles have served investors well across decades and many different market environments, and we believe they will serve us well again. Now, with that conclusion in mind, let's talk about what happened year to date. Coming into the year, we expected the low-quality rally of 2025 to fade and leadership to shift toward profitable businesses with higher returns on invested capital. Historically, this pattern is common following the initial phase of a market recovery from a bear market bottom. In this case, that low was reached in early April 2025.

The speculative rally of 2025 created significant inefficiencies in stock-specific mispricing that allowed us to reposition both portfolios. We initiated new positions and added to existing holdings and revised exposures more aggressively than at any point that I can recall in my 22 years managing the investment process. By the start of 2026, we believe the portfolios were positioned as intended and were beginning to benefit from the broadening of market participation that we expect to occur. That all changed in late February. The onset of the Iran conflict significantly altered market sentiment.

The result was a meaningful increase in both interest rates and future expectations. Not surprising, this disproportionately affected the most economically sensitive areas of the equity market—particularly housing- and construction-related businesses. We continue to be overweight building and construction-related machinery and

materials across both special small cap and mid cap. That was a drag on relative performance in the first half. Although companies are increasingly utilizing debt financing to support these investments, we are not yet seeing any meaningful slowdown in the magnitude or pace of spending.

Entering the year, we believe that broadening beyond mega-cap technology and speculative, unprofitable companies would be supportive for this market. Thus far, the expectation has proven correct. Specifically, regarding AI (artificial intelligence), we have consistently discussed the opportunity set as unfolding in three distinct phases, and we sought exposure across each of them over the course of this year. What did not change was the outlook for capital spending tied to the secular AI investment cycle.

The combination of higher commodity prices, rising interest rates, and the ongoing AI capital spending cycle influences performance across both the Allspring special mid-cap value and special small-cap value portfolios during the first half of this year. Within mid-cap value, the extension and implementation phases of the AI build-out fueled exceptional performance in memory-related companies, most notably Sandisk and Western Digital. Because these stocks are included in the Russell Midcap Value Index and generated outsized returns, our lack of exposure created a meaningful relative performance headwind during the year.

That said, we did participate in several other areas of the AI ecosystem. Holdings such as Teradyne, a leader in semiconductor tests and advanced packaging; Qnity, a semiconductor materials company recently spun on DuPont; and Keysight, a provider of technology testing, R&D (research and development), and commercialization solutions, performed well and contributed positively to performance. However, their gains were insufficient to fully offset our underweight exposure to memory stocks. While memory companies have benefited from extraordinary demand growth, they remain highly cyclical businesses. Historically, supply eventually catches up to demand, margins normalize, and the stock price is correct. We continue to believe that risk remains present today. Although this narrow area of the market represented a significant performance headwind during the first half, we entered the second half with an overweight to technology and a high degree of confidence in the ability of our holdings to continue delivering results aligned with long-term secular AI trends. We enter the second half with significant overweights in technology and industrials as well as health care. We also remain underweight consumer discretionary, financials, and real estate.

Now, the small-cap value portfolio also participated in the extension and implementation phases of the AI build-out through positions such as Amcor, a semiconductor packaging company; Onto Innovation, a provider of process-control solutions for semiconductor manufacturing; and Sanmina, an electronic manufacturing services company helping build the next generation of technology infrastructure. However, as in the case of mid-cap value, what we did not own ultimately had a larger impact on relative performance. In this case, the key differentiator was crypto mining companies. As data center power demand accelerated, these businesses unexpectedly found their access to power had become their most valuable asset. Investors increasingly view them as beneficiaries of a power-constrained environment.

While that outcome was favorable for those companies, many remain inconsistent with the investment characteristics we seek. Specifically, they lack durable profitability, strong cash flow generation, and attractive returns on capital. As a result, we continue to maintain an underweight position to the highly volatile segment. Instead, we pursued exposure to the growing demand for power generation through businesses that better aligned with our process, including a newer position in Babcock and Wilcox, a provider of power generation equipment and maintenance services.

Recent additions have increased our technology exposure, joining the existing overweight in industrials and materials. These sectors provide us preferred means of gaining cyclical exposure while maintaining underweights in the offensive areas of energy, consumer discretionary, and financials. This portfolio would benefit from stabilization in both interest rates and commodity prices.

We remain underweight health care largely due to our underweight position in biotechnology. Unlike the Russell Midcap Value Index, biotech represents a significant weight in the Russell 2000 Value Index. Many of those companies do not possess the cash flow characteristics required by our investment process. Instead, we continue to source portfolio stability through an overweight position in consumer staples.

At the same time, we have carefully reviewed both portfolios to identify companies the market might perceive as potential AI losers—businesses whose products or services could theoretically be displaced by artificial intelligence. This review process has caused us to eliminate several companies while also creating opportunities to increase our investments in what we believe to be fundamentally sound companies whose long-term prospects we believe are being underestimated.

One thing we've noticed about markets in a post-COVID world is it has become far more event-driven. Event-driven around things like COVID itself or the vaccine: market falls, market rises; or Fed policy: interest rate cuts, interest rate hikes; or even geopolitical conflicts. The market is chasing events, and when markets chase events, you'll see the long-term drivers give way to short-term dynamics. But, over time, the long-term drivers stay in place. One of the most important things you can do when you have an event-driven market is stay disciplined in portfolio construction.

These last 18 months remind me of a recent family vacation. We spent hours following our GPS toward our destination.

Occasionally, the GPS would reroute us around traffic, accidents, or road closures. The route changed, but the destination never did. This market has presented its own unexpected detours. Those detours produce a unique set of market leaders and shifted the path we need to take along the way. But our destination remains exactly the same: owning profitable businesses with strong free cash flow generation, healthy balance sheets, and the ability to compound value over time. What has changed is how we navigate that environment. We've adjusted position sizes, trimmed holdings, initiated new investments, and reallocated capital as opportunities have emerged. We've altered the route without changing the destination.

Thank you for your time and your continued confidence in the Allspring Special Global Equity investment process.