Special U.S. Small Cap Value Equity Strategy

John Ognar: Bryant, we just wrapped up the third quarter. And in the small- and mid-cap space, we saw a change in leadership as that rally extended into the third quarter. I just wonder what you were seeing across your strategies.

Bryant VanCronkhite: Yeah, in small- and mid-cap value, we saw high beta outperform low beta and low ROE (return on equity) beat high ROE. And that's what we call a low-quality rally, which is completely standard after a bear market correction, which we had a very brief one at the end of Q1, early Q2. I liken this to going to a children's birthday party where there's a pinata. And the pinata breaks, which in this case, the pinata breaking was the 90-day pause on tariffs. That starts the free-for-all. The kids all run in. They start grabbing as much candy as they can—not really paying attention to what they're grabbing. They grab it all. And that's what we just went through. That is the classic investor behavior after a bear market. You go and grab risk. You grab economic exposure. But we're about to enter the next phase of the economic cycle, which is when the kids sort out the candy, right? They say, well, I don't really like this. Let me throw this out. That's your high beta, low-quality non-earner that investors get rid of. And they say, oh, I really love this. Let me trade for more of this. And that's the high-quality, cash-flowing, good balance sheet companies. And what we're going to see next is the sifting through of what people grabbed in the last few quarters. And the character will change from low quality to more traditional higher quality going forward from here.

John: And I think the other theme we saw in the quarter was a continuation of this narrow focus on the AI theme. As investors look toward the next phase of that AI buildout, how are you approaching that?

Bryant: Yeah, it's especially true as you go up cap to large cap. The AI early winners have dominated the market and that continued into Q3. I don't have any reason to believe they're going to begin to fall off as leaders, but I believe we're going to see a broadening. If AI is the future we all think it's going to be, it's not going to happen without a broadening opportunity for other companies. So, we're going to see more edge devices, more handheld devices, more computers that require AI technology to be created. And we're going to see those companies need different semis and different tests and packaging. We're going to need companies like consultants to help us implement these things. We're going to see the materials companies, like copper producers or chemical producers, require more demand for their products to build more products. We're going to see industrial companies and transportation begin to participate. And so, if AI is what we think it's going to be and we're getting close from buildout to implementation, I don't see how that can happen without a broadening of the market and more companies participating as we go forward.

John: And as we begin the fourth quarter, what do you think are going to be the major events that investors are going to react to, and what's your outlook for the rest of this year?

Bryant: We start the fourth quarter with a government shutdown, which isn't ideal, but the market's not going to care as long as it doesn't go on for very long. So, let's assume that gets taken care of. Then, we head into earnings season. We get an update from corporates as to how things are looking in their view. And where is demand changing? Where is it growing? Where is it shrinking? And that's going to be important. It's especially important this time because expectations are rising. Typically coming into the back of the year, we see expectations falling and setting lower bars. We have the opposite this time, which could create more volatility. And then, beyond that, we really want to listen to companies about how they are going to absorb the benefits of the new One Big Beautiful Bill from a tax situation. And are they going to give us some teasers about how they're going to pass on pricing as tariffs begin to really start to bite when it comes to cost of goods sold? These are the things we're listening for. I expect volatility to continue to grow from here, given the uncertainty and given the higher bar. But that, again, is an opportunity for us to make smart decisions going forward.

John: Thanks, Bryant. Really appreciate your insights, and we look forward to hearing from you next quarter.

Bryant: Sounds good.