Summary
- Market Environment: Q1 was the weakest SMID Cap start since 2020, driven by an AI-tech correction and escalating tariff uncertainty.
- Market Leadership: Defensive sectors held up best, while cyclical and globally exposed areas sold off sharply.
- Performance: The SMID Cap Core Strategy returned -4.68% net, outperforming the Russell 2500’s -7.50%.
- Quality Focus: A disciplined emphasis on quality helped avoid the deepest drawdowns in high-growth, high-valuation stocks.
- Positioning & Selection: A Mid Cap overweight reduced volatility, while strong stock selection in Health Care, Industrials, and Consumer added value.
- Outlook: Despite ongoing policy uncertainty, Small Cap valuations remain attractive, with a focus on quality, durability, and downside protection.
Video Transcript
The first quarter was challenging for SMID Cap equities, marking their weakest start to a year since 2020.
The decline began with a correction in AI-related technology stocks in late January. Market volatility accelerated following President Trump’s announcement of broad-based tariffs affecting most U.S. trading partners, which introduced new uncertainty into global trade dynamics.
The risk of recession increased as tariff concerns grew. Defensive sectors—such as Utilities, Consumer Staples, and Real Estate—held up best, while more cyclical, globally exposed areas like Technology and Consumer Discretionary were repriced meaningfully lower.
In this environment, the SMID Cap Core strategy delivered a net return of -4.68%, outperforming the Russell 2500 Index, which declined -7.50%.
Our relative outperformance was driven by a consistent focus on quality.
Our multi-discipline approach—centered on quality, valuation, and momentum—helped us avoid the steepest drawdowns in high-growth, high-valuation stocks.
An overweight to Mid Cap stocks also reduced exposure to more volatile areas of the Small Cap space, while strong security selection in Health Care, Industrials, and Consumer added to performance.
Looking ahead, market conditions remain uncertain.
Tariff negotiations are fluid, and broader policy risks—fiscal, monetary, and geopolitical—continue to weigh on sentiment. SMID Cap earnings growth has been lackluster since 2021, and while consensus expects a mid-teens recovery in 2025, that outlook is becoming increasingly difficult to support.
Despite this uncertainty, valuations in Small Cap remain attractive relative to Large Cap.
The team is actively seeking selective opportunities in attractively valued Small Caps and quality cyclicals—but only where earnings projections appear durable and achievable.
Our strategy’s emphasis on quality and downside protection is well-suited to navigate this period of elevated uncertainty.
Published 04/21/2025
Johnson Asset Management (JAM) is a division of Johnson Investment Counsel, Inc. (“JIC”), an independent and privately owned Midwestern based investment advisory firm registered with the Securities and Exchange Commission. Johnson Asset Management manages institutional separate account portfolios for a wide variety of for-profit and nonprofit organizations, public agencies, public and private retirement plans, and personal trusts of all sizes. It may also serve as sub-adviser for mutual funds. JIC’s fees are available upon request and may be found in our Form ADV Part 2A. Performance data quoted herein represents past performance. Past performance does not guarantee or indicate future results. All data is current as of March 31, 2025 unless otherwise noted. Returns and net asset value will fluctuate. To determine if this strategy is appropriate for you, carefully consider the investment objectives, risk factors, and expenses before investing. Individual account management and construction will vary depending on each client's investment needs and objectives. Investments employing JIC’s strategies are NOT insured by the FDIC or by any other Federal Government Agency, are NOT Bank deposits, are NOT guaranteed by any Bank or any Bank affiliate, and MAY lose value, including possible loss of principal. Johnson Asset Management claims compliance with the Global Investment Performance Standards. The Institutional Core composite includes all fee paying, fully discretionary, actively managed institutional fixed income portfolios with a minimum value of $500,000 and an investment objective of broad investment grade, taxable fixed income, benchmarked against the Bloomberg U.S. Aggregate Index. The US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar denominated, fixed-rate taxable bond market.
JAM’s policies for valuing portfolios, calculating performance and preparing compliant presentations, as well as a complete list of composite descriptions are available upon request. Please contact our office at 513.389.2770 or 3777 West Fork Road, Cincinnati, OH 45247. All returns reflect the reinvestment of investment income (dividends and/or interest) and capital gains. Valuations and returns are stated in U.S. dollars. Trade date accounting is used. Portfolio returns are calculated using time weighed return methodology on a monthly basis. Net returns shown reflect gross performance less the highest fee schedule for this strategy. Actual client returns would also be reduced by brokerage commissions, custodial fees, and other client paid expenses detailed in JIC’s Form ADV Part 2A.
