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| Quarter | Letter Date | Fund Name | QTD | YTD | Tickers | Themes | Quick Take |
|---|---|---|---|---|---|---|---|
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"Constructive on small-cap growth amid attractive historical valuations and resilient earnings, reallocating capital from AI hardware and cyclicals into select software and healthcare compounders."
During the third quarter of 2026, the Driehaus Small Cap Growth Strategy underperformed its benchmark, declining 14.55% net of fees compared to a 9.39% decline for the Russell 2000 Growth Index. For comparison, the broader Russell 2000 fell 7.23% while the S&P 500 Index gained 2.3%. Strategy underperformance was primarily driven by severe multiple compression across market leadership sectors, particularly industrials and technology, as bond yields rose sharply. Cash weighting stood at 2.5% at quarter-end, with the strategy ending the period overweight financials, consumer staples, and healthcare, while reducing former large overweights in industrials and energy. Macroeconomic headwinds were dominated by surging 10-year and 30-year Treasury yields surpassing 5%, driven by resilient nominal GDP growth above 6%, persistent inflation above the Fed's 2% target, fiscal deficit expansion, and the unwinding of the Japanese yen carry trade. Simultaneously, the market experienced severe factor volatility and profit-taking in artificial intelligence infrastructure, marked by the worst tech momentum drawdown on record. Nevertheless, management views AI capex demand as fundamentally robust, arguing that compute demand continues to outpace data center capacity. Portfolio activity reflected significant sector repositioning. The team reduced industrial exposure from a multi-year overweight toward equal weight by trimming AI-related electrical equipment, engineering, and power grid suppliers. Within technology, exposure shifted from hardware and semiconductors toward software and agentic AI security. Key top holdings at quarter-end included Guardant Health, Praxis Precision Medicines, Spyre Therapeutics, and JFrog, with healthcare providing the strategy's strongest positive contribution.
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