Dissecting AMG River Road Small-Mid Cap Value Fund's Q3 2025 Underperformance Amid a 'RISK ON' Market

The AMG River Road Small-Mid Cap Value Fund (ARSMX) entered Q3 2025 amid a "RISK ON" market environment, characterized by robust earnings, accelerating economic growth, and declining interest rate expectations. Despite these favorable conditions-where small-cap stocks outperformed large-cap counterparts-the fund delivered negative relative results, underperforming its benchmark and peers. This analysis delves into the root causes of its struggles, focusing on stock selection and sector allocation missteps, and evaluates whether strategic recalibration can restore its long-term outperformance potential.

A "RISK ON" Climate Fails to Lift the Fund

The Q3 2025 market was defined by optimism. Strong corporate earnings, coupled with dovish central bank signals, fueled a broad rally in small-cap equities. According to a report by , the broader "RISK ON" environment created "a tailwind for small-cap value strategies," with the Russell 2500 Value Index rising sharply. However, the AMG River Road fund, which , lagged behind. , underscoring the sector's challenges according to the same report.

Stock Selection: A Critical Weakness

The fund's underperformance was heavily influenced by poor stock selection. Portfolio managers R. Andrew Beck, J. Justin Akin, and Todd Mayberry, who oversee the fund's long-term total return strategy, faced scrutiny for their holdings' drag on performance. Seeking Alpha noted that "specific stock selection had a negative impact on relative results," with certain positions failing to capitalize on the market's momentum according to commentary. While the fund's top holdings-such as McGrath RentCorp and Lithia Motors-typically align with its focus on undervalued small- and mid-cap companies as reported, these selections faltered in Q3 2025. The lack of transparency around underperforming stocks complicates diagnosis, but the fund's active management approach appears to have backfired in a quarter where passive strategies thrived.

Sector Allocation: Industrial Overexposure and Missed Opportunities

Sector allocation further exacerbated the fund's struggles. The Seeking Alpha commentary highlighted that "industrials were a notable area of concern," with suboptimal positioning in this sector dragging down returns according to analysis. While industrials generally benefited from the economic recovery, the fund's specific allocations within the sector-likely skewed toward cyclical or overvalued names-underperformed. Conversely, utilities and real estate sectors contributed positively, , respectively according to the report.

These gains were insufficient to offset the drag from industrials and other underweighted areas.

The fund's broader October 2025 portfolio composition-4.7% in cash and no bond holdings according to AAIi data-suggests a high-conviction, equity-focused strategy. Yet, in a quarter where sector rotation was critical, the fund's rigid positioning proved detrimental. For context, as reported by Yahoo Finance. This weight may have amplified the sector's negative impact.

Strategic Adjustments: Pathways to Recovery

To regain its edge, the fund must address two key areas: 1. Enhanced Stock Analysis: The fund's active management approach requires sharper due diligence to avoid mispriced securities. Given the Q3 underperformance, the team may need to refine its valuation models or increase turnover in underperforming positions. 2. Dynamic Sector Rebalancing: The fund's industrial overexposure underscores the need for more agile sector rotation. Reducing risk in overvalued sectors while increasing exposure to high-growth areas-such as technology or healthcare-could align the portfolio with evolving market dynamics.

The fund's long-term objective of outperforming the Russell 2500 Value index remains achievable, but it hinges on adapting to a shifting landscape. As Seeking Alpha observed, "the fund's ability to pivot in response to macroeconomic signals will be critical in 2026" according to analysis.

Conclusion

The AMG River Road Small-Mid Cap Value Fund's Q3 2025 underperformance highlights the perils of rigid stock and sector strategies in a rapidly changing market. While the "RISK ON" environment rewarded nimble investors, the fund's missteps in industrials and stock selection left it trailing. For the fund to reclaim its outperformance streak, its managers must embrace a more flexible approach, balancing long-term value principles with tactical agility. Investors will be watching closely to see if these adjustments materialize in 2026.