Contrarian Investing in a Shifting Landscape: A Deep Dive into Aristotle Small/Mid Cap Equity Strategy's Q2 2025 Performance

In the second quarter of 2025, the U.S. small-cap equity market experienced a rollercoaster ride. The Russell 2000 Index surged 8.50%, fueled by a late-quarter rebound as investors shrugged off early economic concerns and embraced a broader market rally. Yet, for the Aristotle Small/Mid Cap Equity Strategy, the period was more of a test of patience. The fund returned 3.25% net of fees, underperforming the benchmark. While the gap is notable, it reflects a deliberate, long-term approach that prioritizes quality over short-term gains—a strategy that may yet prove its mettle in a world of shifting trade policies and macroeconomic uncertainty.

The fund's Q2 performance highlights the challenges of contrarian investing in a market increasingly driven by macroeconomic narratives. The portfolio, managed by David Adams and Jack McPherson, remains anchored to a bottom-up, fundamental approach, seeking out companies with strong balance sheets, sustainable cash flows, and a high probability of improvement. This philosophy is designed to withstand volatility and capitalize on market inefficiencies—a stark contrast to the momentum-driven strategies that dominated Q2.

A Portfolio Built for the Long Game

The fund's positioning in Q2 2025 reflects a disciplined focus on quality and value. With an active share of 93.7%, the portfolio diverges significantly from the Russell 2500 Index, a testament to the team's conviction in their stock-picking. Holdings like MACOM Technology Solutions (NASDAQ:MTSI) exemplify this approach. The semiconductor manufacturer reported record revenue of $235.9 million in Q2, driven by strong demand in wireless and wireline applications. Despite a one-month decline of 1.73%, MTSI closed at $136.76 per share, reflecting a 34.62% gain over the past year. The fund's decision to hold MTSI underscores its focus on companies with durable competitive advantages and robust financials.

Yet the fund is not blind to the changing landscape. It has also taken a more cautious stance on certain holdings. Tronox Holdings (NYSE:TROX), a titanium dioxide pigment manufacturer, was sold during the quarter. Tronox had lost 62.97% of its value over the past year, closing at $5.85 per share on July 23, 2025. While the fund acknowledged Tronox's potential, it opted for a more aggressive tilt toward AI and energy infrastructure stocks, which it views as offering superior risk-return profiles in the current environment.

Navigating Macro and Policy Shifts

The fund's Q2 positioning also reflects its awareness of the broader macroeconomic and trade policy tailwinds. The Trump administration's “America First” agenda, including the One Big Beautiful Bill Act, has reshaped the economic landscape. The legislation's emphasis on onshoring, tax cuts, and energy independence has created new opportunities for companies in infrastructure, manufacturing, and energy. The fund has responded by increasing exposure to firms that stand to benefit from these trends.

For instance, the portfolio includes companies involved in energy infrastructure, a sector poised to gain from the AI-driven demand for electricity. While the fund does not explicitly invest in AI companies, it has positioned itself to benefit from the infrastructure providers that will underpin the next wave of technological growth. This approach mirrors the broader market's shift toward energy security and technological self-reliance.

The fund's exposure to U.S. liquefied natural gas (LNG) exportation is another example of its adaptability. As global demand for energy grows and U.S. production expands, companies in this space are well-positioned to capitalize on the trend. The fund's contrarian approach means it is not chasing the most obvious winners but rather seeking out companies with strong fundamentals and undervalued potential.

Risk Management in a Volatile Environment

The fund's risk mitigation strategies are a key component of its long-term success. By maintaining a diversified portfolio of 80–120 holdings, with no single position exceeding 4%, the fund limits its exposure to any one company or sector. This diversification, combined with a focus on quality, provides a buffer against market downturns.

The fund's contrarian approach also helps to reduce downside risk. By investing in companies with low market expectations, it avoids the crowded trades that often underperform during periods of volatility. This strategy is particularly relevant in a market where macroeconomic concerns—such as inflation and interest rate uncertainty—remain persistent.

The fund's long-term orientation further enhances its risk profile. With an annual turnover of 20% to 30%, it is not a high-turnover, short-term trading strategy. Instead, it focuses on holding companies for extended periods, allowing the fundamentals to play out. This patience is a hallmark of the fund's approach and aligns with its goal of long-term capital appreciation.

A Contrarian Edge in a Changing World

The Q2 2025 performance may have lagged the benchmark, but it is important to remember that the fund's strategy is not about outperforming every quarter. It is about building a portfolio that can thrive in a variety of economic and policy environments. The fund's emphasis on quality, diversification, and long-term value creation positions it to navigate the uncertainties of the current landscape.

For investors, the key takeaway is that contrarian investing requires patience and conviction. In a world where macroeconomic and trade policy shifts can upend market dynamics, a disciplined, fundamentals-driven approach is more valuable than ever. The Aristotle Small/Mid Cap Equity Strategy exemplifies this philosophy, and while its Q2 performance was modest, its positioning for the future is compelling.

As the market continues to evolve, the fund's ability to adapt to new opportunities—whether in AI-driven energy infrastructure or onshoring-driven manufacturing—will be critical. For those seeking a strategy that balances long-term growth with risk mitigation, the Aristotle Small/Mid Cap Equity Strategy offers a compelling case for investment.