Mid Cap Value – Q4 2025 Commentary

Equity markets generated positive returns in the 4th quarter of 2025, with the Russell Midcap® Value (RMV) Index up 1.42%.  On a full year 2025 basis, the index returned 11.05%. 

The Kennedy Capital Mid Cap Value (MCV) composite declined 1.07% (net of fees) during the quarter, trailing the RMV by 248 bps.  Additional performance information is included in the table below.

Data as of 12/31/2025

Within the MCV composite, stock selection in Industrials and Information Technology sectors were the largest negative contributors to returns (vs. the RMV).  These sectors detracted 145 and 138 basis points, respectively, from 4th quarter relative performance.  On the positive side, stock selection in the Real Estate and Consumer Discretionary sectors favorably impacted relative performance by 82 and 78 basis points, respectively.

2023-2025 Performance Review

Over the combined 2023–2024 period, the MCV portfolio outperformed its benchmark by 485 basis points, returning 32.30% net of fees compared with 27.45% for the index. This strong relative performance, however, was disproportionately driven by 2023, as several holdings within the housing and building products industries that contributed meaningfully early in the period experienced partial reversals as 2024 progressed. While this volatility affected year-to-year attribution, we believe the two-year results remain reflective of the portfolio’s long-term relative return potential.

In 2025, the portfolio declined 0.63% net of fees, compared with an 11.05% return for the benchmark. It is important to assess this shortfall through both a philosophical and a tactical lens. From a style perspective, our investment approach—emphasizing businesses with high cash flow return on invested capital (CFROI®)—was out of favor during the year. This dynamic is evident when comparing the fundamental characteristics of the KCM Midcap Value portfolio with those of the top 50 performing stocks in the Russell Midcap® Value Index (those 50 stocks accounted for approximately 77% of total index returns in 2025). These leading contributors were, on average, significantly lower-CFROI businesses, a market environment in which our discipline has historically underperformed. We view this style headwind as temporary rather than structural.

Source:  HOLT Lens © UBS, FactSet Research Systems Inc.

From a more tactical standpoint, the 2025 performance shortfall can be attributed to three factors of roughly equal magnitude:

1) The portfolio maintained exposure to several fundamentally strong, long-standing holdings facing industry-specific challenges that we believe are temporary in nature.

2) The portfolio was underexposed to the narrow segment of the market most directly benefiting from near-term artificial intelligence-related enthusiasm, which meaningfully influenced benchmark returns.

3) Relative performance was impacted by outsized gains in certain benchmark constituents that do not meet our investment criteria—such as an online financial services platform, which appreciated 204% in 2025, and a media/entertainment company, which rose 173%—as well as two stock selection errors in portfolio positions.  The combined unfavorable impact from these four stocks was approximately 265 basis points during the year.

While market conditions in 2025 were unfavorable for our approach, we remain focused on continuous improvement. We believe that targeted refinements to our portfolio construction process will better position the portfolio for improved results going forward.

Response to Performance Challenges

In response to the recent performance shortfall, it is important to emphasize that we are not altering our core investment philosophy or research process. Our long-standing framework for evaluating how businesses create durable value over time has proven effective across multiple market cycles, and our conviction in this approach remains intact. Periods in which market leadership narrows or thematic factors dominate can present challenges for our discipline, and we recognize that periodically stock selection mistakes will occur. However, we remain confident in the underlying value-creation principles that guide our investment decisions.

That said, we have implemented targeted refinements to portfolio construction and positioning.  In an environment where the range of plausible economic outcomes has widened due to the implementation of policies previously viewed as low-probability, equity markets have become increasingly thematic.  Accordingly, we have sharpened our focus on companies with distinct, company-specific drivers that are less reliant on broad sector or macroeconomic conditions. Consistent with this view, we have exited select positions where near-term demand and fundamentals appear overly dependent on interest rate dynamics.

Additionally, we have initiated targeted investments in businesses with underappreciated exposure to AI-related capital spending, emphasizing companies positioned to benefit over a longer time horizon rather than those that have already experienced substantial multiple expansion. Examples include enablers of electrical transmission infrastructure and a semiconductor equipment provider with potential share gains in advanced chip testing.

Finally, we have proactively adjusted position sizes among certain long-standing holdings facing reduced visibility into intermediate-term demand. While our long-term confidence in these businesses remains intact, we believe it is prudent to reflect near-term uncertainty through more measured portfolio weightings.

As the strategy enters its 25th year in 2026, we remain committed to disciplined execution, thoughtful evolution, and the pursuit of differentiated long-term results for our clients. Please do not hesitate to contact us with any questions or concerns.

Sincerely,

Christian McDonald, CFA^®

Portfolio Manager

Important Disclosures

Kennedy Capital Management LLC (“KCM”) is a Delaware limited liability company headquartered in Missouri.  KCM is registered as an investment adviser with the Securities and Exchange Commission under the Investment Advisers Act of 1940. Registration with the SEC does not imply any level of skill or training. Clients of the Firm include U.S. corporations, pension and profit sharing funds, colleges and universities, trusts, not-for-profit organizations, foundations, and individuals. KCM claims compliance with the Global Investment Performance Standards (GIPS®). GIPS® is a registered trademark of CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein. GIPS® are a set of standardized, industry-wide ethical principles that provide investment firms with guidance on calculating and reporting their investment results to prospective clients to ensure fair representation and full disclosure of an investment firm’s performance history.

 Although the statements of fact and data in this report have been obtained from, and are based upon, sources that the Firm believes to be reliable, we do not guarantee their accuracy, and any such information may be incomplete or condensed. All opinions included in this report constitute the Firm’s judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. A complete list of all securities recommended by KCM in the preceding year, a fully compliant GIPS composite report, and the list of composite descriptions are available upon request from KCM at 10829 Olive Blvd., Suite 100. St. Louis, MO, 63141.

Investing in the stock market involves gains and losses and may not be suitable for all investors. Investing in equity securities is speculative and involves substantial risk.  Mid cap securities may involve more risk than larger-cap securities.  Investments concentrated in sector or specific industry may involve greater risk and volatility than more diversified investments.  

The Mid Cap Value Composite invests in US equity securities and ADRs with market capitalizations that are reflective of the Russell Midcap® Value Index.  The portfolio manager focuses on companies with a demonstrated ability to generate above-average returns on invested capital.  Within that universe, the manager seeks to identify undervalued companies with opportunities to reinvest cash flows at rates of return in excess of their cost of capital.  For comparison purposes the composite is measured against the Russell Midcap® Value Index.  The U.S. Dollar is the currency used to express performance.

Composite specific data provided within this presentation has been calculated from accounts that are discretionary as defined in this paragraph. The assets shown are derived only from discretionary accounts. Non-discretionary accounts, as defined by KCM, are accounts that are not included in the composite due to one or any combination of the following criteria: there were significant cash inflows or outflows within the account; the account’s asset level did not meet the minimum requirement to remain in the composite; the account assets are managed by others using our non-discretionary model. The temporary removal of such an account occurs at the beginning of the month and the account re-enters the composite the month after the criteria has been met.

Performance returns are presented gross and net of investment advisory fees and include the reinvestment of all income. Gross of fee returns reflect the deduction of transaction costs and custodian fees but do not reflect the deduction of investment advisory fees. Net of fee performance is calculated using gross returns less the actual applicable annual management fee applied monthly. Past performance is not indicative of future results. A client’s return will be reduced by the advisory fees as described in Form ADV Part 2A and other expenses incurred by the account. For example, an annual advisory fee of 1% compounded quarterly over 10 years will reduce a gross 14.44% annual return to a net 13.32% annual return. Form ADV Part 2A is available upon request.

The performance figures reported herein are unaudited, may be based upon information obtained via electronic data sources (”feeds”) and may be subject to change. Data feeds from many of KCM clients’ selected custodians are obtained through third party sources, and are used to compare custodial data to KCM’s client account records as frequently as daily. Monthly, KCM reviews clients’ account holdings along with cash and share quantities against the custodial statements. In some instances, variances may exist between final audited custodial information and the information KCM obtains via such data feeds. Generally, any such variances are researched and reconciled within thirty days of the period end.

The information provided should not be considered a recommendation to purchase or sell any particular security. There is no assurance that any securities discussed herein will remain in a KCM portfolio at the time you receive this letter or that securities sold have not been repurchased. Allocations among industries, sectors and securities may vary and are subject to change without notice. Any securities discussed do not represent an account’s entire portfolio and, in the aggregate, may represent only a small percentage of an account’s portfolio holdings. It should not be assumed that any of the industry or sector allocation decisions mentioned, or securities transactions or holdings discussed were or will be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein.

Sector Weightings are subject to change at any time.  Sectors are based on the Global Industry Classification Standard (“GICS”) classification scheme and are measured as a percentage of the total composite in terms of asset value as of the date indicated above.  Individual client portfolios may be different based on variations in security purchase price and date, and individual client restrictions. 

GICS was developed by and is the exclusive property and a service mark of Morgan Stanley Capital International, Inc. (”MSCI”) and Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. (”S&P”) and is licensed for the use by KCM. Neither MSCI, S&P, nor any other party involved in making or compiling the GICS or any GICS classifications makes any express or implied warranties or representations with respect to such standard or classification (or the results thereof),and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability, and fitness for a particular purpose with respect to any of such standard or classification. Without limiting any of the foregoing, in no event shall MSCI, S&P, any of their affiliates or any third party involved in making or compiling the GICS or any GICS classifications have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.

Allocations to various asset classes change over time and deviate from any stated or targeted percentages of a total portfolio as a result of market conditions and reallocation decisions. Therefore, nothing herein reflects a static portfolio allocation that will remain the same or match stated target allocations of asset classes.

Russell Investment Group is the source and owner of the Russell Index data contained or reflected in this material and all trademarks and copyrights related thereto.  The presentation may contain confidential information and unauthorized use, disclosure, copying, dissemination or redistribution is strictly prohibited.  This is a presentation of Kennedy Capital Management.  Russell Investment Group is not responsible for the formatting or configuration of this material or for any inaccuracy in Kennedy Capital Management’s presentation thereof.   

The Russell Midcap® Value Index measures the performance of the mid-cap value segment of the U.S. equity universe. It includes those Russell Midcap® Index companies with relatively lower price-to-book ratios, lower I/B/E/S forecast medium term (2 year) growth and lower sales per share historical growth (5 year). The Russell Midcap® Value Index is constructed to provide a comprehensive and unbiased barometer of the mid-cap value market. The Index is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true mid-cap value market.

The Russell Midcap® Value Index is used as the benchmark.  The Index is unmanaged and represents total returns including reinvestment of dividends.  The benchmark is used for comparative purposes only and generally reflects the comparable risk or investment style of the Firm’s strategy.  The investment portfolios underlying the Index are different from the investments in the portfolios managed by the Firm. Certain accounts may also use other benchmarks not listed in the GIPS composite report. The Verification and Performance Examination Report does not cover the benchmark returns included in the GIPS composite report.  Investors cannot invest directly in an Index.

The Russell 2000® Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000® Index is a subset of the Russell 3000® Index representing approximately 7% of the total market capitalization of that index, as of the most recent reconstitution. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership. The Russell 2000® is constructed to provide a comprehensive and unbiased small-cap barometer and is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true small-cap opportunity set.

The Russell 1000® Index measures the performance of the large-cap segment of the US equity universe. It is a subset of the Russell 3000® Index and includes approximately 1,000 of the largest securities based on a combination of their market cap and current index membership. The Russell 1000 represents approximately 93% of the US market. The Russell 1000® Index is constructed to provide a comprehensive and unbiased barometer for the large-cap segment and is completely reconstituted annually to ensure new and growing equities are included.

The S&P® 500 is widely regarded as the best single gauge of large-cap U.S. equities. According to our Annual Survey of Assets, an estimated USD 15.6 trillion is indexed or benchmarked to the index, with indexed assets comprising approximately USD 7.1 trillion of this total (as of Dec. 31, 2021). The index includes 500 leading companies and covers approximately 80% of available market capitalization.