Summary
- Market Backdrop: Q2 was marked by heightened volatility driven by shifting U.S. trade policy, with early tariff announcements triggering a sharp SMID Cap selloff before a 90-day delay sparked a swift recovery.
- Market Leadership: As economic growth continued and sentiment improved, performance favored lower-quality, cyclical stocks, particularly in Technology, Industrials, and Consumer Discretionary.
- Performance: The Johnson SMID Cap Core Strategy returned +4.90% net of fees, trailing the Russell 2500 Index’s +8.59% gain for the quarter.
- Attribution: Sector allocation added value, but gains were more than offset by stock selection, as the market rotated toward riskier, higher-beta names.
- Style Headwinds: The strategy’s emphasis on high-quality, lower-volatility companies, including positions in Industrials and Health Care, faced relative headwinds during the quarter.
- Outlook: Valuations for SMID Cap equities remain attractive versus Large Cap, though a slower pace of Fed rate cuts and near-term earnings softness have delayed normalization. With earnings growth expected to resume, high-quality companies appear best positioned to manage tariff uncertainty, rising input costs, and margin pressures.
Video Transcript
Hi, I’m Brian Kute, Portfolio Manager for the Johnson SMID Cap Core strategy. Thank you for joining me for our quarterly update.
Markets were volatile again this quarter, driven largely by shifting U.S. trade policy.
Early in April, the White House announced a new round of steep tariffs, triggering a sharp selloff in SMID Cap stocks.
But just a week later, the announcement of a 90-day delay in implementation sparked a rally that fully recovered the first quarter’s decline.
As the economy continued to grow and sentiment improved, the market rally favored lower-quality, cyclical names—particularly in Technology, Industrials, and Consumer Discretionary.
Meanwhile, our strategy’s focus on high quality and low-volatility companies, especially in sectors like Industrials and Health Care, faced relative headwinds.
For the quarter, the SMID Cap Core strategy returned +4.90% net of fees, compared to +8.59% for the Russell 2500 Index.
While our sector allocation added value, it was more than offset by stock selection.
Factor trends—especially the market’s rotation into riskier, more cyclical names—challenged our balanced approach that blends quality, valuation, and momentum.
Looking ahead, we continue to see strong relative valuation support for SMID Cap versus Large Cap, but a slower pace of Fed rate cuts and lingering earnings softness have delayed that gap from closing.
Encouragingly, after four quarters of earnings declines, growth is expected to return this quarter.
Tariffs remain a wildcard, but high-quality companies are best positioned to navigate rising input costs and margin pressures.
Our team made a few portfolio adjustments this quarter, exiting names where the quality profile had deteriorated and reallocating to smaller-cap companies with stronger fundamentals.
We remain focused on long-term quality investing.
Thank you for your time and interest.
Published 07/22/2025
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.
