Summary
- Market Environment: Q3 featured a strong risk-on rally led by speculative growth and small-cap stocks.
- Performance: SMID Cap Core returned 3% net of fees versus 9% for the Russell 2500 Index.
- Headwinds: The portfolio’s high-quality focus and mid-cap overweight detracted as lower-quality stocks outperformed.
- Sector Impact: Conservative positioning limited participation in cyclical and speculative growth rallies.
- Valuations: SMID caps remain attractively valued relative to large caps, with earnings growth expected to accelerate.
- Outlook: While risk appetite is elevated, the strategy remains committed to disciplined, long-term quality investing and risk management.
Video Transcript
Hello, I’m Brian Kute, portfolio manager for the SMID Cap Core strategy.
Thank you for joining me for a brief update on third-quarter results and portfolio positioning.
Equity markets advanced during the third quarter, led by speculative growth and early-cycle value stocks.
Low-quality companies delivered outperformance not seen since the post-pandemic recovery in 2020.
This persistent risk-on environment created a challenging backdrop for active managers focused on quality.
Within the SMID Cap universe, small caps outperformed mid caps by more than seven percentage points—the third-widest quarterly margin in the past 30 years.
More than one-fourth of Russell 2500 stocks gained 20 percent or more during the quarter.
In such an environment, characteristics typically favored by investors—such as low volatility, consistent earnings, and downside protection—acted as relative performance headwinds for quality-oriented managers.
The SMID Cap Core strategy returned 3 percent net of fees, compared with a 9 percent gain for the Russell 2500 Index.
The portfolio’s high-quality focus was the primary driver of relative underperformance, extending a headwind that began in April.
Unprofitable companies led the rally, with SMID Cap “non-earners” rising 18 percent on average, versus 7 percent for profitable companies—the widest gap since 2020.
The portfolio’s mid-cap overweight also detracted from results, given the unusually strong performance of small caps.
Security selection results were affected by these broad factor headwinds, with ten of eleven sectors underperforming and several stocks declining by 15 percent or more.
The portfolio’s more conservative positioning limited participation in strong cyclical rallies within sectors such as Financials and Consumer Discretionary, while underexposure to speculative growth themes in Technology, Health Care, Energy, and Utilities further weighed on results.
Looking ahead, investor risk appetite remains elevated.
Confidence continues to build that recession is no longer the base case, supported by robust AI-related capital spending, stabilizing corporate earnings, and continued monetary policy accommodation.
While these dynamics have recently benefited high-risk stocks, a sustained expansion could broaden market participation and return favor to high-quality companies.
SMID Cap valuations remain attractive relative to large caps, with earnings growth expected to accelerate as we move into next year.
Quality investing is a long-term approach, and risk management, which respects the uncertainty of markets, remains an important focus, especially after such a sharp move higher in lower-quality stocks.
Thank you very much for joining and we appreciate your interest in our strategy.
Published 10/21/2025
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 September 30, 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.
