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Quarter	Letter Date	Fund Name	QTD	YTD	Tickers	Themes	Quick Take

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Driehaus Small/Mid Cap Growth Fund 2026 Q3 Investor Letter | Buyside Digest

Back to Fund Profile (Driehaus Small/Mid Cap Growth Fund)

Primary Source Intelligence • Q3 2026 Letter Analysis

Driehaus Small/Mid Cap Growth Fund Quarterly Analysis

Buyside Digest is not affiliated with, and does not endorse, Driehaus Small/Mid Cap Growth Fund. This analysis is provided for institutional research purposes only and is not investment advice.

Fund Returns

QTD-16.8%

YTD+2.63%

Annualized+14.18%

Positioning StanceCONSTRUCTIVE

Market CapSMID Cap

GeographyUS

Digest Analysis

Quick Take

"Constructive on small/mid-cap growth equities as record earnings and depressed valuations offset yield volatility, reallocating capital toward cybersecurity, software, and healthcare while paring industrials."

Executive Summary

During the third quarter of 2026, the Driehaus Small/Mid Cap Growth strategy faced severe style headwinds, declining 16.80% net of fees compared to a 10.35% drop for the Russell 2500 Growth Index and a 2.3% gain for the resilient S&P 500 Index. Year-to-date, the strategy remains up 2.63% net of fees. Factor rotations triggered historic drawdowns in medium-term momentum and market sensitivity, prompting tactical shifts across sectors. The team significantly reduced industrials from an overweight to an underweight position, while rotating selectively into software, cybersecurity, financials, and healthcare, ending the period with a 4.1% cash position. The macroeconomic landscape was pressured by a sharp surge in Treasury yields, with both 10-year and 30-year yields topping 5% due to robust nominal GDP growth exceeding 6%, expanding fiscal budget deficits, and the unwind of the Japanese yen carry trade. Concurrently, investor sentiment deteriorated amid elevated geopolitical tensions and pre-election anxiety. Despite these macro headwinds and intense debate over AI capital expenditure returns, the manager views hyperscaler infrastructure spending as durable, underpinned by acute compute shortages and the exponential growth of enterprise and consumer AI agents. From an attribution standpoint, healthcare served as the sole positive contributor (+4.3%), buoyed by commercial drug launches and clinical milestones, with top holdings including Guardant Health (2.5%), Praxis Precision Medicines (2.2%), and Natera (2.1%). Detractors were led by industrials (-26.4%) and technology (-18.4%), where holdings suffered dramatic multiple compression despite upward earnings revisions. The manager actively pared hardware and semiconductor exposure to lean into agentic AI and cybersecurity software, arguing that small-cap growth valuations now sit at historically depressed levels while corporate earnings continue to hit record highs.

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Institutional Meta Strategy

Meta Strategy Gauges

Algorithmic conviction, macroeconomic posture, and risk appetite signals extracted from this quarterly letter with qualitative explanations.

Signal Matrix

Market Conviction

45%

CautiousHigh

Moderate (45%)

The portfolio maintains broad diversification with 122 positions and a modest top holding concentration, where the largest position represents just 2.5% of assets. While sector rotations and positioning adjustments are executed decisively, single-stock theses are not articulated in granular detail.

Growth Outlook

65%

BearishBullish

Bullish (65%)

Management remains constructive on the near-term outlook for equities, citing resilient nominal GDP growth, record corporate earnings progression, and bottom-of-the-range small-cap valuations. This constructive stance is tempered by ongoing recognition of high interest rates and macro uncertainty.

Risk Appetite

60%

DefensiveAggressive

Balanced (60%)

Portfolio positioning remains primarily invested with modest cash at 4.1%, maintaining an active overweight in high-beta information technology. However, risk was reined in by substantially trimming industrials from a multi-year overweight to an underweight following adverse momentum.

Capital Deployment

50%

De-riskingDeploying

Net Neutral (50%)

Net capital deployment is balanced, marked by internal sector reallocations out of cyclical industrials and into secular software and financials, leaving total cash steady at 4.1%.

Forward Guidance

65%

CautiousExpansionary

Expansionary (65%)

The team demonstrates a selective buying bias, actively reallocating capital into software, cybersecurity, and financials to capitalize on compressed valuations. Tactical flexibility remains high as they monitor interest rate stabilization and post-election market breadth.

Language Signal

55%

BearishBullish

Balanced (55%)

Directional language balances severe drawdowns in momentum, multiple compression, and macro headwinds against robust fundamental commentary highlighting durable earnings growth, exponential AI demand, and historical post-midterm strength.

Perceived Risk

65%

Low RiskElevated

Elevated Risk (65%)

Management highlights prominent external risks, including 10-year Treasury yields surpassing 5%, rising fiscal deficits, the Japanese carry trade unwind, geopolitical conflicts, and regulatory hurdles around data centers.

Opportunity Density

60%

ScarceAbundant

Selective (60%)

Compelling opportunities are identified specifically within cybersecurity, agentic AI software, and oversold small-cap compounders, though broad market participation remains constrained by yield pressures.

Time Horizon

55%

Short-TermLong-Term

Multi-Year (55%)

The strategy employs an intermediate-term holding framework of one to three years, tracking multi-year capex cycles and earnings growth while actively managing tactical quarterly momentum shifts.