SMID Cap Growth – Q4 2025 Commentary

Artificial intelligence and political policy (e.g., tariffs, regulation, defense funding, immigration, Fed policy) continued to dominate business headlines and fuel market volatility. While at the same time, resilient consumer spending and increasing capital investments underpinned the ongoing earnings growth of public companies. The result has been equity markets that continue to grind higher despite underlying churn and volatility. In Q4 specifically, we saw a strong recovery in the Biotechnology & Pharmaceuticals sectors (up >25%) drive a positive performance for the Russell 2000® Growth (R2G) Index, despite the remaining sectors, in aggregate, retreating slightly after an extremely robust third quarter.

Looking at calendar year 2025 as a whole, U.S. equity markets recovered from an initial tariff-induced sell-off to produce another year of robust double-digit returns. However, it proved to be a difficult year for small-cap active managers to outperform the indices. Looking under the hood, this is likely because quality factors significantly lagged. Analysis of the R2000 reveals that stocks with High Short Interest, Low NTM Sales Growth, Low Share Price, Negative FCF and High Bankruptcy Risk led returns in 2025 vs. Low Leverage, Dividend Payers, Low LTM Sales Growth and High ROE stocks that lagged the most. Additionally, the S&P Small-Cap Quality index suffered its worst annual relative performance since its launch, underperforming the R2000 by over 1100 bps last year. Performance was also unusually concentrated in a small number of stocks. For example, within the R2G, the top ten stocks generated 5.3% of the index’s total 13.0% return, or said another way, excluding these ten companies, the remaining R2G was up just +7.7% for the year.

Performance:

The KCM SMID Cap Growth (SMIDG) composite gained 0.93% (gross of fees) and 0.76% (net of fees) for the fourth quarter of 2025, outperforming the Russell 2500^TM Growth (R2500G) Index, which increased 0.33%, by 60bps (gross of fees) and 43 bps (net of fees). For the calendar year 2025, the KCM SMIDG composite increased 5.33% (gross of fees) and 4.65% (net of fees), underperforming the R2500G Index, which increased 10.31% by 497 bps (gross of fees) and by 566 bps (net of fees). Additional performance information included in the table below.

Data as of 12/31/2025

On a relative basis, Health Care and Information Technology were the best-performing sectors versus the benchmark in the quarter. Health Care was led by a recovery in the shares of Globus Medical. Inc. (GMED), a medical device company focused on musculoskeletal disorders. Q3 results reset the outlook with a major acceleration in core U.S. spine growth due to market share gains. In addition, the sales contribution from recently acquired Nevro Corp was meaningfully higher than expected, leveraging cost synergies to contribute profits more quickly than originally expected. The deal will now be accretive to earnings this year. We are pleased to see GMED back on track with the growth drivers we originally anticipated at purchase. Information Technology benefitted from strong performance in the shares of MACOM Technology Solutions Holdings, Inc. (MTSI), a manufacturer of semiconductors used in telecommunications, industrial, defense and data center industries. Their earnings outlook continued to increase on the back of strong demand trends in multiple end markets that they serve, leveraging ongoing company-specific investments and operational improvements that management had already been executing on.

The largest detractors to relative performance for the quarter were Industrials and Communications Services. The underperformance within Industrials was led by a Leonardo DRS, Inc (DRS), a provider of defense products and technologies. The stock gave back its year-to-date gains following Q3 results despite strong sales and record orders as operating margins were just flat on higher R&D spend and geranium supply issues. The market seems to be pricing in that these margin headwinds will persist, whereas we expect they will prove temporary and 2026 will see a return to margin expansion due to structural improvements in business mix, sales leverage and secured geranium supply. We continue to hold the stock. Communications Services was impacted by a retreat in the shares of Magnite, Inc. (MGNI), a provider of digital advertising infrastructure. Despite accelerating growth in their Connected TV (CTV) product and progress on the Google antitrust legal proceedings, the shares were impacted by general competitive and macro concerns around the open internet business, digital video (DV+), which is still 55% of the overall business. We think these concerns, as they relate to MGNI specifically, are overblown and continue to hold the shares.

For the calendar year 2025, the strategy did not keep up with the Index. On a relative basis our strongest-performing sectors for the year were Consumer Discretionary and Health Care. Industrials and Materials were the largest detractors to performance.

Outlook:

With overall market valuations relatively full (vs. historical averages), we believe changes in the expectations of individual company earnings growth will be key to stock gains in 2026.  Consensus is anticipating a re-acceleration of the economy, which could lead to a broadening out of markets into more cyclical beneficiaries. Interest rates and tax policy (via the One Big Beautiful Bill) should be supportive of the increasing consumer spending and business investments required to drive this. We expect AI investment spending to remain hot with supply the gating factor, supporting continued earnings strength within this ecosystem. However, emerging AI productivity gains from the adoption of AI tools and processes will be key to sustainability of this investment spending beyond 2026 and identifying the next leg of winners (and losers). We continue our focus on these topics with every company interaction, as we believe the impacts will be far-reaching over the next decade.

While these conditions inform our views on the overall environment and subsequent opportunities, the core of our strategy remains focused on identifying individual companies that can benefit from durable trends, or simply their own unique product opportunities, to gain market share and/or expand their end markets meaningfully with good economic returns. We use scenario analysis and continually adjust the portfolio to lean into the best risk/reward opportunities that the market provides. We will continue to focus on this “true north” methodology in 2026, while remaining cognizant of the major disruptions and new opportunities that the deployment of artificial intelligence is expected to unleash.

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.

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.

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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.  Due to rounding, Sector Weighting’s total percentages my not equal 100%.

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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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