Despite what we perceived to be a positive earnings season for our portfolio companies in the first three months of 2025, equity markets were up against re-emerging geopolitical tensions and uncertain domestic policy regarding tariffs.  These two latter factors have understandably weighed on US equities broadly, and small caps in particular, as they have driven consumer and industrial prices higher while lowering asset values, consumer confidence, and consumer spending.  

In addition to a few stock-specific factors impacting the Hood River US Small Cap Growth Fund’s first quarter performance, the broader risk-off environment drove stock correlations higher and turned investors’ attention away from fundamentals and earnings growth.  We have always remained diligent yet humble in our work process, and the first quarter was certainly a difficult environment for investing.  For the three months ending March 31, 2025, our US Small Cap Growth Fund was down -15.15%, or -403 basis points (“bps”) versus the Russell 2000® Growth’s -11.12% (the benchmark).  Over the last twelve months, the strategy is up +0.87%, or +573 bps versus the benchmark.  A table of longer-term returns is provided below.

	Annualized, as of 3/31/25
	1 Year	3 Year	5 Year	10 Year	Since Inception
Small-Cap Growth Fund (Inst)	0.87%	4.32%	21.01%	11.46%	12.38%
Russell 2000® Growth Index	-4.86%	0.78%	10.78%	6.14%	9.33%
HRSMX vs Benchmark	5.73%	3.54%	10.23%	5.32%	3.05%

Performance quoted represents past performance for the Fund’s institutional class shares and there is no guarantee of future results.  Short-term performance may reflect conditions that are unsustainable and may not be repeated or consistently achieved in the future.  The investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than the original cost.  Current performance may be higher or lower than the performance data quoted above.  Please call 800-497-2960 to obtain current and the most recent month-end performance data.  The gross expense ratio:  1.07%; net expense ratio: 1.07%.  Performance would have been lower without limitations in effect.  Fund inception: 01/02/2003

The strategy’s underperformance in the first quarter was attributed to stock selection (-334 bps), with industrials (-311 bps), energy (-113 bps), and consumer discretionary (-9 bps) representing the largest detractors.  Alternatively, financials (+92 bps), information technology (+23 bps), and consumer staples (+1 bps) were positive contributors for the quarter.  Sector allocation effect during the quarter was negative as a whole.

Over the past three years, our research has consistently identified artificial intelligence (AI) and its supporting infrastructure as a primary global growth driver, making it a significant portion of our technology and industrial exposure.  Historically, our stock selection across the AI landscape has generated significant alpha.  However, this quarter brought heightened uncertainty for nearly all AI-related companies. Investor concerns were predominantly focused on the scalability of infrastructure and the substantial capital expenditures necessary to meet the demands of hyperscale AI.  A critical moment of doubt was triggered by the unveiling of China’s Deepseek, which raised questions about the staggering costs involved in training AI models and led to a sell-off among affected stocks. Furthermore, reports of potential budget cuts among major industry players intensified worries, casting uncertainty on the growth prospects within the sector.

Despite these challenges, our direct discussions with management teams have reinforced our positive outlook, with spending projections remaining robust.  Interestingly, rather than stalling development, the launch of Deepseek has catalyzed plans for infrastructure expansion. While the market currently anticipates capital expenditures to be around 8% in 2026, we believe the reality will likely approach 20% on a broader scale.

One of our big winners over the last several years, Fortress Aviation, cost us over 140 bps of stock selection in the quarter due to multiple compression tied to multiple short reports.  Earnings estimates have continued to move upward.  We had sold approximately 40% of the position in the second half of 2024 due to valuation, and although we disagree with the short report, we did lower the position size again in Q1 to less than 100 bps of the portfolio. 

Market volatility remains elevated due to mixed macroeconomic signals, a scenario familiar to those who have navigated small-cap portfolios over the years.  Historical patterns demonstrate that uncertainty can unsettle markets, but it simultaneously creates opportunities.  Our experience in managing through such environments bolsters our belief that these turbulent periods often precede more favorable conditions.  By adhering to a disciplined investment strategy, we continue to build a portfolio focused on positive earnings surprises and invested in companies we are confident have strong fundamentals, which we believe should ultimately receive recognition from the broader market.

Heading into second quarter, all sector weightings are within +/- 300 bps of the benchmark apart from information technology, where we have a +630 bps overweight.

Lastly, the recent selloff amongst equities has taken some of the air out of valuations.  The S&P 500® Index is now trading at 20x 2026 earnings, which is admittedly still an elevated valuation, in our view.  The Russell 2000® Growth is at a roughly 10% discount, despite typically trading at a 20% premium.  Thus, from a valuation perspective, we believe US small caps remain attractive going forward.

As we progress through 2025, we maintain an agile approach, balancing opportunities with prudent risk management.  During uncertain times, analysts often overlook positive bottom-up developments, which can lead to significant information gaps that we are eager to exploit.  Our focus on identifying these inefficiencies has led to our long-term outperformance.  By leveraging our extensive experience and strategic insights, we are well-equipped to navigate the changing market landscape, all while remaining committed to long-term growth.

Brian Smoluch & David Swank

Basis Points (“bps”) is a unit of measure used to describe the percentage change in the value of an investment. Alpha is defined as the excess return versus the benchmark when adjusted for risk. Earnings are a company’s profit after taxes.  The S&P 500 Index is a market-capitalization weighted index of 500 leading publicly traded companies in the U.S.

 Investment Considerations:

All investing includes risk, including the loss of principal.  There can be no guarantee that any strategy (risk management or otherwise) will be successful.  The Fund invests in small-cap securities which present a greater risk of loss than large-cap securities, and in growth companies which can be more sensitive to the company’s earnings and more volatile than the stock market in general.  The Fund also invests in foreign securities which are subject to risks including currency fluctuations, economic and political change and differing accounting standards.  The Fund may invest in derivatives and IPOs, which are highly volatile.  Additional risk information may be found in the prospectus.

 All information in this report is as of March 31, 2025 unless otherwise indicated.  The benchmark is the Russell 2000® Growth Index, defined as an unmanaged, capitalization weighted index of those Russell 2,000 companies with higher price-to-book ratios and higher forecasted growth values. Index returns include dividends and/or interest income and do not reflect fees or expenses. In addition, unlike the composite, which periodically maintains a cash position, the Russell 2000^® Growth Index is fully invested.   Investors cannot directly invest in an index.

Investors should carefully consider the Fund’s investment objective, risks, charges, and expenses before investing.  For a prospectus, which contains this and other important information about the Fund, please call 800-497-2960.  Please read the prospectus carefully before investing or sending money.

 The Hood River Small Cap Growth Fund is distributed by Quasar Distributors, LLC.  Hood River Capital Management LLC serves as the advisor to the Hood River Small Cap Growth Fund.       

NOT FDIC INSURED-NO BANK GUARANTEE-MAY LOSE VALUE