SMID Cap Value – Q4 2025 Commentary

Equity markets generated positive returns in the 4th quarter of 2025.  The Russell 2500™ Value (R25V) Index rose 3.15%, the Russell 2500™ Growth (R25G) Index was up 0.33%, and the S&P 500® Index (S&P) rose 2.66%.

Small and mid-cap equities generated steady performance in Q4 despite concerns around the impact of the government shutdown and softening labor market trends.  The Federal Reserve cut interest rates by 25 basis points in October and December (following a 25-basis-point cut in September) in response to the weakening labor market.  Small/mid biotechnology and pharmaceuticals stocks were notably strong in the quarter (up 33% and 21%, respectively, within the Russell 2500™ Value) in response to easing monetary policy as well as an increase in M&A activity within the space.

From a sector perspective (within the R25V), Health Care +16.84%, Information Technology +9.13% and Materials +4.27% were standout performers.  On the downside, Consumer Staples -6.27%, Consumer Discretionary -1.78%, and Real Estate -1.58% were notable underperformers.

The Kennedy Capital Smid Cap Value (SMCV) composite decreased 0.33% (net of fees) during the quarter, underperforming the R25V by 3.47%.  For the rolling 12-month period, the SMCV composite returned 6.64% (net of fees), compared to the R25V’s return of 12.73%, underperforming by 6.09%. Additional performance information is included in the table below.

Data as of 12/31/2025

Within the SMCV composite, stock selection in the Health Care (-128 basis points), Industrials (-123 basis points), and Consumer Staples (-62 basis points) sectors were the largest negative detractors to 4th quarter relative performance.  Within the Health Care sector, pharmaceuticals and biotechnology stocks were meaningful headwinds to relative returns, detracting (156) and (57) basis points, respectively.  Conversely, stock selection in Consumer Discretionary (+56 basis points) and Real Estate (+48 basis points), positively impacted performance.

Over the 12-month period, stock selection in the Financials, Information Technology and Industrials sectors were the largest negative detractors to SMCV relative performance.  These sectors negatively impacted relative returns by 252, 160 and 159 basis points, respectively, to performance.  Real Estate, Consumer Discretionary, and Utilites sectors were positive contributors to relative returns for the year, impacting relative performance by 71 bps, 61 bps, and 30 bps, respectively.

2025 Market Review

Source:  FactSet Research Systems Inc.

U.S. equity markets in 2025 were shaped by sharp swings in sentiment, driven less by underlying fundamentals and more by policy uncertainty, macro headlines, and periodic bursts of speculative enthusiasm. The year began with heightened volatility as aggressive U.S. trade policies and a wave of tariff announcements raised concerns about rising inflation, weakening corporate earnings, and the risk of a broader economic slowdown. Small-cap equities declined sharply through early April as investors grappled with the potential consequences of a renewed global trade war.

Market conditions improved meaningfully as the year progressed. Signs of de-escalation in trade tensions, combined with resilient economic activity, helped drive a strong rebound in equities beginning in the second quarter.  Equity markets accelerated further in the second half of the year, aided by more accommodative Federal Reserve policy (three interest rate cuts).

Market leadership throughout much of 2025 was narrow and increasingly theme driven. Investor focus gravitated towards thematic areas such as artificial intelligence, nuclear power, and early-stage biotechnology (among others), often rewarding narratives over near-term fundamentals. This backdrop created a challenging environment for active investors with a long-term, fundamentals-driven approach.

The chart below provides a useful lens through which to view relative portfolio performance during the challenging second half of 2025. The 50 best-performing stocks within the Russell 2500™ Value Index over this period (shown in green) have, in aggregate, exhibited poor track records of economic value creation, with returns on invested capital that are often low or negative.  In contrast, the companies within the SMID Cap Value portfolio (shown by the blue bars) have historically generated meaningfully higher economic returns, which we expect to continue over time.  Consistent with our longstanding philosophy, our strategy will typically lag the Index during these speculative periods, but tends to outperform over the medium to long term as fundamentals and valuation come back into focus.

Source:  HOLT Lens © UBS, FactSet Research Systems Inc.

Thoughts on the year ahead (and beyond)

Looking ahead, we remain constructive.  Steady economic activity, easing monetary policy (falling rates), and a less volatile global trade environment (fingers crossed) should be supportive of small cap earnings growth.  Secular growth tailwinds from areas such as artificial intelligence should also be a positive driver for several companies in our portfolio.  Lastly, we see compelling valuation opportunities across the market where solid fundamental performance has been overlooked by investors.  We’ve learned through navigating multiple cycles that if we stay patient and stick to our knitting – finding high quality businesses at attractive prices – we are able to generate above average returns through a market cycle.

We welcome the opportunity to discuss any questions or concerns you may have, and we thank you for the opportunity you have given us to manage your account.

Sincerely,

Portfolio Managers

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 and mid 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 SMID Cap Value Composite will be invested in value securities of predominately small and mid cap companies that generally have a market capitalization that is reflective of the Russell 2500™ Value Index.  The Investment Manager generally looks for undervalued companies generating cash flow returns on invested capital greater than industry peers.  SMID Cap Value portfolios generally demonstrate valuations below and growth characteristics at or above those of the benchmark.  The weighted average market capitalization of the Portfolio will generally be reflective of the average market capitalization of the Russell 2500™ Value 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 asset 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 2500™ Value Index measures the performance of small to mid-cap value segment of the U.S. equity universe. It includes those Russell 2500™ 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 2500™ Value Index is constructed to provide a comprehensive and unbiased barometer for 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 value 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.

The Russell 2500™ Value 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.

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 S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. According to our Annual Survey of Assets, an estimated USD 13.5 trillion is indexed or benchmarked to the index, with indexed assets comprising approximately USD 5.4 trillion of this total (as of Dec. 31, 2020). The index includes 500 leading companies and covers approximately 80% of available market capitalization.