Small Cap Core – Q4 2023 Commentary

The Market 

The positive boost to the market during the fourth quarter was delivered by the Federal Reserve. Having burnished its reputation as a force of slowly measured change over recent years, the now overused term “fed pivot” quickly graced the pages of the financial press. We’ve noted the pressure the Fed has applied to the domestic economy during 2023, largely through its interest rate controls, but also through its “higher for longer” jawboning. Market participants roundly welcomed the late-quarter change.

At the same time, the continuing geopolitical unrest has been an unbalancing force to the global economy. While unfortunately, the Ukrainian-Russian battles have continued without resolve, tensions in the Middle East have jumped sharply. The human toll is sickening and of primary concern. However, global markets, after absorbing and adjusting to COVID and Eastern European-related supply chain disruptions, are now in the grip of further disruptions. Almost all companies have some connection to global trade flows, and operating personnel need to think two steps ahead to figure out how to plan their businesses for 2024. The resultant market volatility we’ve seen has almost become the norm.

Performance Recap

For the fourth quarter of 2023, the KCM Small Cap Core Composite returned 11.00% (gross of fees) and 10.75% (net of fees), compared to the Russell 2000® Index, which rose 14.03%.  On a year-to-date basis, the respective gross, net, and benchmark numbers are 5.38%, 4.43%, and 16.93%.

Looking back a year ago, we had outperformed our benchmark nicely in 2022 (-16.00% net of fees vs -20.44%) but were disappointed not to have been able to turn in positive overall returns for our clients. This year, we earned positive returns for clients but did not capture nearly as much of the rising market as we would have expected. The following discussion will provide context around the weightings and individual stocks that drove performance during the fourth quarter.  Additional performance information is included in the table below.

Data as of 12/31/2023

Within the Small Cap Core Composite, sectors that we most heavily overweighted versus the benchmark were Industrials, Consumer Discretionary, and Health Care.  Sectors that were significantly underweighted included Communication Services, Energy, and Materials.

During the fourth quarter, our strongest relative outperformance was achieved in Information Technology, Materials, and Real Estate.  On the negative side, Health Care, Industrials, and Consumer Discretionary had an unfavorable impact on performance.  Stock selection was a negative factor during the quarter, particularly in the Health Care sector but also in Industrials.

The three stocks that were the most significant detriments to performance in the quarter were a provider of tracking devices for solar installations, a manufacturer of engineered equipment for the industrial gas, energy, and biomedical industries, and a supplier of systems for proppant and chemical management to oil and gas drillers.  The provider of tracking devices for solar installations in the U.S. underperformed our expectations due to several factors. Revenue expectations fell as projects were delayed due to module availability and uncertainty around the Inflation Reduction Act. Also, high interest rates altered economics for developers, leading to further uncertainty. The manufacturer of engineered equipment for the industrial gas, energy, and biomedical industries delivered revenue for the third quarter of 2023 below expectations. The company attributed this slower growth primarily to supply chain delays. Given the high growth expectations for 2024, this reset in 2023 seems to have dented investor sentiment. Finally, the supplier of systems that provide proppant and chemical management to oil and gas drillers has been negatively impacted by the drop in rig counts in 2023. While we are encouraged by the company’s earnings growth in 2023, we realize that the business is somewhat beholden to oil and natural gas price fluctuations. The company has kept its leverage in check, which has been a factor in helping it to maintain its earnings strength.

The three best-performing stocks in the portfolio were a provider of endpoint security, an operator in the insulation distribution and installation space, and a developer of software that helps to manage a company’s data in the cloud. The provider of endpoint security software was a stock we purchased in October 2023. We believed that the company participated in a high-growth segment of software but that expectations were mixed due to reports of various competitors. Its third-quarter earnings report and outlook helped to dispel fears of weaker spending, driving the stock higher. While the new home market has been volatile in 2023, the operator in the insulation distribution and installation space has been able to grow revenue and, more importantly, earnings each quarter. Its outlook has been buoyed by acquisitions in recent years as well as solid execution. Finally, another information technology stock we purchased in 2023 has provided solid returns. The company provides software that helps to manage a company’s data in the cloud. As data growth has proliferated, partly as a result of artificial intelligence innovations, its solutions have gained traction. After slow topline growth for several quarters, revenue and earnings growth accelerated in the third quarter, as have forward expectations.


The past three months have brought both encouraging and sobering developments that warrant an update to our investment outlook. While our initial concerns around inflation, interest rates, and their economic impact remain, recent data hints at a potential easing of pressures. However, geopolitical tensions and lingering supply chain disruptions inject a necessary dose of caution.

Central banks have exhibited a delicate balancing act – taming inflation while fostering continued, albeit subdued, economic growth. This cautious approach aligns with our earlier thesis that investor confidence hinges on the perception of near-term stability. Initial signs suggest this may be taking shape, potentially driving fund flows towards equities, including small caps.

We remain confident in the long-term potential of small caps and believe their agility, focus on innovation, and ability to capitalize on niche markets make them well-positioned to navigate challenging times. We have carefully chosen companies within the portfolio that demonstrate these strengths and remain committed to proactive portfolio adjustments as circumstances unfold. We thank you for allowing us to continue to manage your assets and look forward to the future – whatever the economy may bring.


Donald Cobin, CFA®

Portfolio Manager

Alex Mosman, CFA®

Assistant Portfolio Manager

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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.

The Small Cap Core Composite invests in a mix of small cap value and small cap growth companies, which KCM believes to have strong intrinsic value and growth rates above the Russell 2000® Index. 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 assets 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, Inc.  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.