SMID Cap Growth – Q1 2026 Commentary

Following a robust U.S. equity market performance in 2025 that was led by technology and large capitalization stocks, the first two months of the year began with a fairly strong rotation into value and small capitalization stocks . . . which was interrupted on February 27, 2026, by the shock of airstrikes on Iran by the United States and Israel. As the Iran conflict dragged on, it led to a significant sell-off in equity markets, closing out the quarter near the lows. We have the benefit of writing this letter a couple of weeks after the quarter close, when we can see that the market has already fully recovered following the announcement of a cease-fire. While global macro uncertainties remain, we would suggest using caution when analyzing this particular quarter’s performance given the timing of the quarter closing. Simply isolating the majority of the impact of the conflict on equity markets as occurring between the initial airstrikes and the announcement of the ceasefire, one can see the full cycle impact of the conflict on the portfolio (and relative performance) as follows:

Gross YTD Performance           SMIDG             Vs. R2500G

At 2/27/26                                  +1.80%                 -78bps                  Air strikes after market close

At 3/31/26                                   -5.54%                -202 bps               Quarter end date             

At 4/8/26                                    +1.20%                 -22 bps                 Cease fire after market on 4/7

Note: These interim performance observations are provided for illustrative context only and do not represent standard reporting periods.

Additionally, one characteristic of recent markets that appears to be sustaining, regardless of market direction, is “narrowness”. The impact of this on the general small capitalization universe is illustrated by the fact that the top 5 contributors to the Russell 2000® Index’s performance in Q1 drove >100% of the index’s small positive returns. The magnitude of this impact on the more concentrated Growth universe was even larger, as these same five stocks led the Russell 2000® Growth index, contributing a positive +182 bps vs. the index’s overall decline. All five stocks are industrial or technology companies that benefit from the scale of deployment of artificial intelligence capabilities and the supporting infrastructure.

Performance:

The KCM SMID Cap Growth (SMIDG) composite declined -5.54% (gross of fees) and -5.70% (net of fees) for the first quarter of 2026, underperforming the Russell 2500™ Growth (R2500G) Index, which declined -3.52%, by -202bps (gross of fees) and -218 bps (net of fees). Additional performance is included in the table below.

Data as of 3/31/2026

On a relative basis, Information Technology and Industrials were the best performing sectors versus the benchmark in the quarter. The outperformance in Information Technology was led by a company that makes optical transceivers and lasers, critical components in the design of AI data centers that have been identified as a bottleneck. Against this market demand backdrop, the company, the smallest of the three suppliers, made a major investment in onshore manufacturing capacity for the next-generation product cycle (800G/1.6T) that will come online beginning in Q2 2026 and ramp through mid-2027. The stock benefitted in the quarter from receiving their first major contract wins and management providing initial guidance on the pipeline of customer demand that they expect to convert into sales over the next year. Industrials was led by gains from a provider of infrastructure construction services. The company is benefiting from accelerating demand in their primary end markets against the backdrop of a multi-year US infrastructure investment cycle spanning data centers, power grid modernization, natural gas pipelines, fiber/broadband and renewable energy. Their strong backlog provides good visibility with the potential for continued margin lift.

The largest detractors to relative performance for the quarter were Consumer Discretionary and Communications Services. The underperformance within Consumer Discretionary was led by an operator and franchisor of fitness centers. The company provided a more muted growth guidance for 2026 (+9% revenues, +9-10% EPS) than their previously expressed multi-year +double-digit growth algorithm, feeding into concerns that the consumer is weakening and/or that the market is reaching saturation. We believe this is an overreaction and the current valuation is attractive for this growing, high return on capital, franchise-focused business. Communications Services was impacted by the continued decline in the shares of a provider of digital advertising infrastructure. Despite accelerating growth in their Connected TV (CTV) product and expected future benefits from the Google antitrust legal proceedings, the shares have been impacted by general competitive and macro concerns. We think these concerns, as they relate to the company specifically, are overblown and continue to hold the shares.

Outlook:

Public policy changes, artificial intelligence investments, and now the extended Iran conflict have each resulted in business disruptions and increased uncertainty . . . but with that also comes new opportunities. We continue to apply our durable investment frameworks to this changing landscape and have found attractive opportunities both within the expanded infrastructure investment areas as well as the potentially disrupted services markets. As the market embraces these new technological capabilities, we expect an increasingly dynamic feedback loop that will reward a nimble and active investment approach.

Thank you for your continued confidence in the Kennedy Capital team. Should you have any additional questions, please do not hesitate to contact us.

Sincerely,

Portfolio Manager

Assistant Portfolio Managers

Important Disclosures

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The SMID Cap Growth Composite invests in growth securities of predominately small and mid cap companies that generally have a market capitalization that is reflective of the Russell 2500™ Growth Index. The Manager seeks companies with durable business models able to deploy assets into growing sets of opportunities providing superior rates of return. For comparison purposes the composite is measured against the Russell 2500™ Growth 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.

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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 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® Value Index measures the performance of small-cap value segment of the U.S. equity universe. It includes thoseRussell 2000® 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 2000® Value Index is constructed to provide a comprehensive and unbiased barometer for the small-cap value segment. The Index is completely reconstituted annually to ensure new and growing equites are included and that the represented companies continue to reflect value characteristics.

The Russell 2000® Growth Index measures the performance of the small-cap growth segment of the U.S. equity universe. It includes those Russell 2000® companies with relatively higher price-to-book ratios, higher I/B/E/S forecast medium term (2 year) growth and higher sales per share historical growth (5 year). The Russell 2000® Growth Index is constructed to provide comprehensive and unbiased barometer for the small-cap growth segment. The Index is completely reconstituted annually to ensure new and growing equities are included and that the represented companies continue to reflect growth characteristics. 

The Russell 2500™ Growth Index measures the performance of the small to mid-cap growth segment of the U.S. equity universe. It includes those Russell 2500™ companies with relatively higher price-to-book ratios, higher I/B/E/S forecast medium term (2 year) growth and higher sales per share historical growth (5 year). The Russell 2500™ Growth Index is constructed to provide a comprehensive and unbiased barometer of the small to mid-cap growth market. The Index is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true small to mid-cap opportunity set and that the represented companies continue to reflect growth characteristics.

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