Small Cap Select – Q4 2025 Commentary

The Market:

U.S. small-cap equities experienced a volatile fourth quarter but finished the period higher and ended the year up double digits overall. That outcome came amid a mixed policy backdrop, including the reopening of the U.S. government following a shutdown and continued interest rate cuts by the Federal Reserve, extending the easing cycle that began earlier in the year.  As the quarter progressed, fewer themes were driving returns, with early signs of rotation away from some of the more speculative areas that had driven earlier gains.

Performance:

For the fourth quarter of 2025, the Select Composite experienced a return of 2.21% (gross of fees) and 2.04% (net of fees) compared to the Russell 2000®, which returned 2.19%.  For 2025, the Select Composite experienced a return of 12.51% (gross of fees) and 11.67% (net of fees) compared to the Russell 2000®, which returned 12.81%.  Certain account performance may vary from this composite performance due to client-initiated account restrictions on certain types of holdings or due to client cash flows.  Additional performance is included in the table below.

Data as of 12/31/2025

Information Technology was our best-performing sector during the quarter despite the portfolio remaining underweight compared to the benchmark. Performance was driven by strong returns from our holdings rather than increased sector exposure. A company which designs high-performance analog semiconductors used in data centers, communications, and defense applications was a top contributor as demand tied to the continued buildout of AI infrastructure, higher-speed connectivity, and strength in defense markets remained solid. The company’s positioning in next-generation data center architectures continues to improve, and recent results supported our view that these secular drivers remain in place.  A developer of musculoskeletal implant products and enabling technologies for spine surgery also performed well during the quarter. Shares benefited as organic growth accelerated following a period of supply chain disruptions. Along with this, they completed an acquisition earlier in the year at a very moderate price, and the company’s revenue has proven much more stable than anticipated. That resilience meaningfully improves the long-term value of the transaction and supports our thesis.  We remain invested.

Materials was our weakest-performing sector during the quarter, as stock selection weighed on results. A company which provides technology-enabled education services was among the larger individual detractors. Shares declined after management noted that changes to its education management system contributed to higher student churn and limited mid-year enrollment growth. While these issues created near-term pressure, the company continues to grow annual enrollment and execute well operationally, and the stock’s reaction appeared disproportionate to underlying fundamentals. An independent sell-side platform for programmatic advertising was another detractor. Shares declined following changes at a competing platform that created short-term disruption in their online advertising segment. While this affected some smaller customers, most large publishers returned to the company, reinforcing its importance to core clients. These dynamics do not alter our thesis around connected TV advertising, where market growth remains strong and the company’s position continues to be supported by expanding partnerships with leading publishers and platforms. We remain invested in both companies.

Overall, 2025 was a strong year for equities. The global tariff shock announced by the U.S. administration in April led to a sharp market decline which was followed by a strong rebound and rising equity markets for the remainder of the year. A meaningful share of market returns during that period came from speculative and risk-oriented assets, including companies with limited profitability and highly thematic positioning. Our portfolio has exposure to these areas, including biotechnology and the artificial intelligence ecosystem, but with less emphasis on the most speculative segments of the market. In that context, the portfolio held up well, driven primarily by stock-specific developments rather than factor exposure. Our focus on identifying underappreciated catalysts proved valuable over the course of the year. Eight companies in the portfolio were acquired, as peers or competitors also recognized value where we did. More broadly, our holdings generated higher returns across most sectors, reflecting progress at the company level rather than reliance on narrow market leadership. We remain committed to our process of investing in companies where durable improvement is underway.

Portfolio, New Investments, and Positions Exited:

As of December 31, 2025, we are most overweight in the Industrials, Communication Services, and Consumer Staples sectors, while we are most underweight in the Energy, Health Care, and Financials sectors.  During the quarter, we increased our exposure to cyclical industries.  As always, our sector allocations are driven by where we find the most attractive investments.

The Future:

Looking ahead, the macroeconomic backdrop appears relatively stable. Interest rate cuts are easing financial conditions, which is generally supportive of valuations and economically sensitive companies. The U.S. labor market has remained more resilient than expected, helping sustain consumer and business activity. Inflation has also proven less sensitive to tariffs than initially feared, easing concerns about renewed pricing pressure. Taken together, these dynamics point to a more balanced environment than many anticipated.

At the same time, investment tied to artificial intelligence remains a dominant trend, benefiting both companies directly exposed to the buildout and those beginning to implement these technologies across their operations to improve productivity.

Overall, the current backdrop appears favorable for equities. In this setting of a generally stable economic environment alongside rapid technological change, we remain focused on identifying companies where fundamental improvement is underway and not yet fully reflected in valuations, with an emphasis on clear catalysts, strong balance sheets, and disciplined risk-reward.

Thank you for your continued confidence in us.  Please do not hesitate to reach out if you are interested in additional information or have questions about the positioning of the portfolio.

Sincerely,

Portfolio Manager

Assistant 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.  Small 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 Small Cap Select Composite invests in small cap value and small cap growth companies that demonstrate valuation below, return on assets above and return on equity above those of the Russell 2000® Index, while observing tax sensitivity strategies. For comparison purposes the composite is measured against the Russell 2000® 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 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 2000® 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.