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| Quarter | Letter Date | Fund Name | QTD | YTD | Tickers | Themes | Quick Take |
|---|---|---|---|---|---|---|---|
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"Macro-driven factor rotations and trade policy volatility are creating valuation dislocations across domestic small caps, favoring quality franchises benefiting from supply chain reshoring and infrastructure investment."
The abrdn U.S. Small Cap Equity Fund fell 9.92% net of fees for the Institutional Class in the third quarter of 2026, underperforming the Russell 2000 Index decline of 7.23%. Year-to-date, the Institutional Class advanced 15.07% net of fees versus 13.71% for the benchmark, while the 1-year net return stood at 15.72%. Quarterly underperformance was driven by factor-led market volatility and stock-specific pullbacks in educational and semiconductor holdings, which overshadowed resilient underlying company fundamentals across core portfolio allocations. Macroeconomic sentiment weakened amid escalating trade friction, persistent Middle East geopolitical unrest, and renewed stagflation fears. The Federal Reserve increased the federal funds target range by 25 basis points to 3.75%–4.00% while signaling further rate hikes ahead. Simultaneously, the US instituted 10% to 12.5% tariffs on 60 nations and a 50% tariff on Canadian imports, eliciting retaliatory measures. Despite these headwinds, factor dislocations have created attractive entry points across inefficient domestic small-cap equities. Portfolio activity centered on deploying capital into high-quality businesses exposed to structural tailwinds such as reshoring, technological innovation, and infrastructure spending. The manager initiated new positions in Artivion, Curbline Properties, Hamilton Lane, Kaiser Aluminum, Ultra Clean Holdings, and Valvoline. These purchases were funded by exiting positions in Aritzia, ATS Corporation, Griffon Corporation, KB Home, Knife River Corporation, Mueller Water Products, and Patrick Industries.
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