Special Small Cap Value Fund

John Ognar: Hi, I'm John Ognar, portfolio specialist with the Special Global Equity team. I'm joined today by Bryant VanCronkhite, the senior portfolio manager and co-team lead of the Special Global Equity team. Bryant, thanks for joining us today.

Bryant VanCronkhite: Happy to do so.

John: Great. Well, I thought maybe we could start with a recap of the first quarter of 2025 and you could talk to how the team strategies did and then we'll get into kind of a more forward-looking view on the markets.

Bryant: Yeah, sounds great. So, one of the things we look forward when assessing returns historically is the character of the returns. The team’s process is designed to do certain things in certain types of market environments. Early in the quarter, we saw the market have a lot of optimism around the pro-America policies that were coming into place. And that optimism led the market to move higher and our process allowed us to lag a little bit early on in the quarter across our portfolios. But as that risk of that not materializing fast enough or maybe not even going the way people thought began to creep into markets and we saw the market sell off, we saw factors like beta underperform. We saw people focus on quality businesses that have competitive advantages. We saw balance sheet strength become more important to the outcome patterns and the character of our process allowed us to outperform on a relative basis versus our benchmarks and our peers across most of our portfolios in the quarter. So, the recap for us is that the process is working. The character, the returns, and outcomes are what we expect. And ultimately, we think that we're going to allow ourselves a chance to win through stock selection as we roll forward into Q2 and beyond this year.

John: Well, that's interesting. I know you were very vocal late last year in talking about concentration levels of the major indices and how we could see a value rotation ensue. I'm just wondering how that's playing out so far through 2025.

Bryant: Well, so far in the first quarter, it's played out exactly as we thought. Value has outperformed growth indices, whether it's small cap, mid-cap or large cap U.S. equity markets. And so, value is winning. What's driving that is the idea that we came into the year in a highly concentrated market with a handful of names driving market performance. Those names were dominated by what I call growthier companies. The Mag 7 was a big piece of that, but by and large, what we saw across small, mid, and large was a huge discrepancy in the valuations paid for growth companies versus value companies. And it left very little room for growth to continue to compound and outperform based on the starting point of valuation. And as the earnings growth rates of growth companies have begun to slow and the growth rates of value companies and growth companies converge to the same level, we have to ask ourselves, why do we pay so much for the growth companies compared to the value companies when the growth rates are about the same? And so, that led us to believe that value would reassert itself in a relative basis versus growth. That hasn’t happened and we think it should continue for the near term, at least through Q2. And we'll see and reassess as we get into the second half.

John: Well, I don't think we could have any market discussions without talking about tariffs. It certainly has dominated the headlines. And as we sit here in the first week of April—obviously some major announcements related to trade policy and tariffs—just wondering what you think the implications are for the markets going forward.

Bryant: Yeah. Let's rapidly get through the obvious ones. Certainly, it's going to allow the U.S. to negotiate trade terms with other countries in a way that we haven’t been able to do successfully for a long time. What does it mean for businesses, though? Well, it means they have uncertainty around where they should build factories. They have uncertainty around where to source materials. And in the interim, while it all gets sorted out, they probably have to pay more for their cost of goods sold. And so, that's a big deal for margins. It's a big deal for potential price increases as it flows through to their customers. But when you step back and you think about what's actually happening here when you look at the broader markets, this is a tool to allow the administration to begin to create an output gap. An output gap is the amount of supply of something relative to the demand of something. And if they want to bring inflation down, if they want to get rates lower, which seems to be an ultimate goal for this administration, they need to trigger an output gap. Volcker did it through raising rates materially back in the late 1970s and Trump and the administration are doing it by maybe raising prices and creating an output gap on demand, which could trigger a recession, right? Don’t get me wrong. The market is moving negatively post-Liberation Day because of the fear of a recession, but that ultimately allows freedom for us to have a lower deficit on the fiscal side, to transfer the economy from one led by the government to one led by private companies, and hopefully then allow us to rebase and grow off of that in a healthier way. We need to see the sausage-making process happen right now, which could be messy, but ultimately, that seems to be the goal of this administration. And tariffs is just one tool in their toolbox to achieve that.

John: Well, thanks, Bryant. Those are some interesting insights. I'm encouraged to hear that the short-term pain that the tariffs might be inflicting on the markets could actually have some potential longer-term benefits for investors. So, I think those are some great insights and I really appreciate you sharing those with us today.

Bryant: It was a pleasure. Thank you.