Small Cap Select – Q2 2025 Commentary

The Market:

U.S. small-cap equities posted strong gains in the second quarter. After the U.S. administration’s tariff pronouncements sparked early April’s sell-off, the market rebounded once investors recognized the steep rates were more a negotiating tactic than permanent policy. A temporary 90-day rollback created room for talks, and while broader resolutions remain uncertain, several smaller trade deals were completed, supporting the rebound. Meanwhile, macroeconomic data remained solid— core inflation trended lower and employment metrics held steady. The combination of a more measured trade environment and resilient economic indicators helped drive equities higher through quarter-end.

Performance:

For the second quarter of 2025, the Select Composite experienced a return of 8.49% (gross of fees) and 8.27% (net of fees) compared to the Russell 2000®, which returned 8.50%.  Year-to-date, the Select Composite experienced a return of 3.06% (gross of fees) and 2.64% (net of fees) compared to the Russell 2000®, which returned -1.79%.  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 6/30/2025

During the second quarter, some of the benchmark’s best-performing attributes were tied to lower-quality factors. Companies with the weakest return-on-equity and little or no profitability led performance. Our portfolio tends to emphasize higher-quality businesses, which aims to create a headwind when the market favors more speculative traits. Despite that, we generally kept pace with the benchmark, supported by three portfolio holdings that were acquired at attractive premiums. These takeouts spanned multiple sectors, including Information Technology, Industrials, and Utilities. We believe our long-term investment philosophy— focused on identifying companies with distinctive strategies for creating value— continues to drive positive outcomes, even in environments where our style is less favored.

Our weakest sector during the quarter was Materials, where a producer of construction materials and services, weighed on performance.  Unusually severe weather, along with a recent acquisition that increased the company’s exposure to northern markets, disrupted operations and pressured margins.  We view these as temporary seasonal impacts and believe the company remains well-positioned to execute on its margin-enhancement strategy.  We continue to hold the position.  Our largest individual detractor was a provider of musculoskeletal implants and surgical solutions.  Execution challenges during the quarter were driven by distributor inventory reductions and a slowdown in capital equipment sales.  In addition, a previously announced acquisition proved more disruptive than initially expected.  Despite near-term challenges, we believe the core business can return to historical execution levels, and we expect integration progress to improve.  We remain invested.

Our best-performing sector was Communication Services, led by a provider of digital advertising infrastructure.  The company continues to benefit from growth in its Connected TV segment, where it enables streaming platforms to deliver and monetize ad inventory.  The company also stands to gain from a recent court ruling that found Google’s ad-serving practices to be monopolistic.  While penalties remain undecided, we believe a more level playing field presents a meaningful opportunity for the stock to grow market share.  We continue to own the stock.  A provider of 3D imaging hardware and software, was another key contributor.  We initiated the position earlier this year based on margin improvement and a growing partnership strategy.  Shares rose sharply after a peer announced plans to acquire the company at a substantial premium.

Portfolio, New Investments, and Positions Exited:

As of June 30, 2025, we are most overweight the Industrials, Materials, and Communication Services sectors, while we are most underweight the Health Care, Energy, and Financial sectors.  During the quarter, we decreased our exposure to cyclical industries.  As always, our sector allocations are driven by where we find the most attractive investments.

The Future:

Trade policy remains a large swing factor as we head into the second half. Even after recent postponements, tariffs sit well above where they began the year—10% on most imports, steeper bands on China, and new sector-specific levies. Where policy ultimately lands is still unclear: durable agreements would reinforce the constructive backdrop of easing inflation and steady employment, while stalled talks could slow activity and squeeze margins. Rather than predict the exact outcome, we stay focused on companies with clear catalysts, clean balance sheets, and management teams that can create value across a range of scenarios. This long-term, research-driven approach keeps the portfolio positioned to participate if tensions ease and to remain resilient if they persist.

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

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 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.  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.