Small Cap Select SRI – Q1 2025 Commentary

The Market:

U.S. small caps declined in the first quarter, pressured by a mix of policy shifts and market uncertainty. The new presidential administration announced tariffs targeting Canada, Mexico, and China— some of which were implemented, while others were delayed or rolled back. The shifting nature of these actions introduced uncertainty around import costs and supply chains. At the same time, monetary policy remained unchanged, though commentary from the Fed acknowledged building inflationary pressures. Together, these factors contributed to a weaker backdrop for equities.

Performance:

For the first quarter of 2025, the Select SRI Composite experienced a return of -5.12% (gross of fees) and -5.28% (net of fees) compared to the Russell 2000^®, which returned -9.48%.  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 information is included in the table below.

Data as of 3/31/2025

Industrials was our best-performing sector in the quarter, driven by strong stock selection across several names. A key contributor was a provider of business process management solutions. We added the position last quarter after client-specific disruptions created what we believed was a temporary setback. This quarter, the company reported solid sequential growth— an early sign that it’s returning to its historical pattern of steady execution. The stock responded accordingly. We continue to hold the position, as we believe the core demand drivers and long-term opportunity remain intact.  Another standout was a specialty food distributor serving high-end restaurants and hospitality clients. The company continues to expand its customer base, improve margins, and generate solid cash flow. We remain invested, as we believe the long-term growth opportunity remains compelling and the company has demonstrated strong operational discipline.

Financials was our most challenged sector during the quarter. Our overweight in investment banking equities, which underperformed the broader group, was the primary driver.  The largest individual detractor was a provider of data management software. The company experienced an unexpected increase in customer churn, which we believe was the result of internal execution issues rather than competitive pressures. We remain invested, as we see a path forward for improvement in sales execution and customer retention.  A retailer of western and work-related apparel, was another detractor. The stock declined following the announcement of tariffs on both China and Mexico, as the company sources a significant portion of its products from those countries. With tariff implementation now underway, we reduced our position.

Portfolio Changes:

As of March 31, 2025, we are most overweight the Materials and Industrials sectors, while we are most underweight the Financial and Health Care sectors.  During the quarter, we reduced our exposure to cyclical industries.  As always, our sector allocations are driven by where we find the most attractive investments.

The Future:

 The macroeconomic landscape has shifted meaningfully as trade policy takes center stage under the new administration. Tariffs now extend well beyond China, impacting a broader set of global trading partners. The effects on supply chains, pricing, margins, and demand are still playing out. With negotiations underway, we’re evaluating how a hardline stance versus a negotiated resolution might unfold and refining our investment outlooks accordingly. Regardless of the outcome, the impact of these policy shifts is not uniform. We are identifying companies with greater insulation, those with more direct exposure, and those that could benefit from the disruption. That work continues to shape how we allocate capital and assess risk across the portfolio.

We entered this period with a slightly higher-than-normal cash position, which has given us the flexibility to selectively and patiently add to names we believe were overly punished in the recent selloff. We’ve adjusted position sizes— both buying and selling— where we believe the risk/reward became favorable. Even in the face of uncertainty, our focus remains on identifying and investing in companies with unique strategies for enhancing returns and creating value.

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.

The Small Cap Select SRI 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 Index, while observing social restriction 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 composites 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.