Navigating Volatility: Undervalued Small-Cap Gems in Nationwide WCM's Q1 2025 Portfolio

The Nationwide WCM Focused Small Cap Fund's Q1 2025 performance underscores the challenges and opportunities inherent in small-cap equities during periods of policy-driven uncertainty. While the fund underperformed its benchmark, its manager's analysis reveals a landscape primed for disciplined investors to capitalize on undervalued opportunities as the economy transitions out of volatility. Here's how to parse the data and position for recovery.

A Mixed Quarter, But a Clear Thesis

The fund's KCM Small Cap Growth (SCG) composite fell 12.30% (gross of fees) in Q1 2025, lagging the Russell 2000® Growth (R2G) Index by 118 bps. This underperformance stemmed from sector-specific headwinds and broader macroeconomic shifts, including new tariffs and rising inflation fears. Yet, the fund's focus on companies with durable business models and secular growth drivers positions it to rebound as markets stabilize.

Sector Insights: Where to Find Value

The fund's Consumer Discretionary and Financials allocations were bright spots. A standout was a factory-built housing manufacturer (e.g., a company addressing affordability gaps via trade-down trends and captive retail channels). Its strong gross margins and market-penetration strategy exemplify the “undervalued but resilient” theme.

Meanwhile, an insurance brokerage firm in Financials rebounded with double-digit organic revenue growth, benefiting from strategic deleveraging. These sectors are poised to outperform as the economy transitions from recessionary fears to recovery.

Conversely, IT and Healthcare holdings lagged. A semiconductor firm faced valuation corrections due to tariff risks, while a clinical research outsourcing provider grappled with ERP-related margin pressures. These challenges, while material, may present buying opportunities if fundamentals improve post-2025.

Policy Risks and Recovery Catalysts

The fund's commentary highlights policy uncertainty as a key driver of volatility. New tariffs and immigration reforms have disrupted supply chains and inflated costs, pushing recession probabilities higher. Yet, the manager notes that small caps have already priced in much of this negativity—many are down over 20% year-to-date—creating a fertile environment for long-term investors.

Historically, small caps have outperformed in recovery phases due to their agility and exposure to domestic growth. The fund's focus on market-share expansion and end-market dominance aligns with this cyclical advantage.

Investment Thesis: Timing the Recovery

For investors seeking undervalued small-cap opportunities, the fund's strategy offers two key entry points:
1. Consumer Discretionary: Companies addressing structural gaps (e.g., housing affordability) are well-positioned to grow as consumer sentiment improves.
2. Financials: Firms with strong balance sheets and organic growth (e.g., the insurance brokerage) can capitalize on rising interest rates and post-recession credit demand.

Meanwhile, IT and Healthcare require patience. The semiconductor firm's product roadmap execution (e.g., AI-driven datacenter solutions) could unlock value once tariff risks subside. Similarly, the healthcare provider's margin pressures are temporary; its strong post-spin bookings suggest a rebound by 2026.

Final Call: Hold and Rebalance

The Nationwide WCM Focused Small Cap Fund's Q1 results reflect short-term turbulence but highlight a disciplined approach to growth equity investing. For long-term portfolios, this is a buy-the-dip scenario:
- Hold the fund through policy clarity and earnings stabilization.
- Rebalance allocations toward its outperforming sectors (Consumer Discretionary, Financials).
- Monitor IT and Healthcare positions for catalysts like tariff resolution or margin recoveries.

As history shows, volatility often masks undervalued gems—especially in small caps. The fund's focus on durable, growth-oriented businesses makes it a compelling vehicle to navigate the recovery phase.

Disclaimer: Past performance does not guarantee future results. Sector allocations and stock-specific risks should be evaluated individually.