Navigating Small-Cap Growth: Key Insights from the Wasatch U.S. Select Fund's Q3 2025 Performance

The Wasatch U.S. Select Fund's Q3 2025 performance offers a compelling case study in the challenges and opportunities of high-conviction small-cap investing. Amid a macroeconomic landscape marked by cooling labor markets, persistent inflation, and sectoral imbalances, the fund's concentrated portfolio of 20–40 stocks highlights both the risks and rewards of targeting mid-cap growth companies. According to a report by Wasatch Global, the fund's strategy prioritizes "bottom-up, fundamental analysis" to identify firms with sustainable competitive advantages and strong management teams. Yet Q3 results reveal how even well-researched portfolios can falter when macroeconomic headwinds collide with sector-specific vulnerabilities.

A Tale of Two Sectors: AI-Driven Growth vs. Consumer Disruption

The fund's Q3 performance was shaped by divergent outcomes in its holdings. On the positive side, Medpace Holdings (MEDP) and Fabrinet (FN) surged, driven by robust demand for AI-related infrastructure and semiconductor manufacturing as reported in its strategy documentation. These companies exemplify the fund's focus on "industry-leading innovation." Conversely, BellRing Brands (BRBR) and Inspire Medical Systems (INSP) dragged on returns, underscoring the fragility of consumer-facing and healthcare growth stocks in a high-interest-rate environment as detailed in the analysis.

The contrast between these outcomes reflects broader macroeconomic trends. As stated by Boston Trust Walden, the U.S. economy is experiencing "a bifurcation of growth," with AI-driven sectors outpacing traditional industries. Small-cap investors must now navigate this duality: capitalizing on high-growth niches while avoiding overexposure to sectors facing margin compression or regulatory scrutiny.

Macroeconomic Headwinds: A Test for High-Conviction Strategies

The fund's Q3 results also expose the risks of a high-conviction approach in a volatile macroeconomic environment. While the S&P 500 rose 8.1% in Q3 2025, small-cap stocks faced headwinds from rising borrowing costs and a slowing labor market. The Wasatch U.S. Select Fund's focus on mid-cap companies-many of which lack the balance sheet strength of large-cap peers-amplifies their vulnerability to interest rate fluctuations. For instance, Shift4 Payments (FOUR) underperformed due to macroeconomic concerns and integration costs from its acquisition of Global Blue as highlighted in the analysis, illustrating how leveraged buyouts can strain smaller firms during periods of economic uncertainty.

Strategic Resilience: Lessons for Small-Cap Investors

Despite these challenges, the fund's performance underscores the importance of disciplined stock selection. Its emphasis on companies with exceeding sector benchmarks in earnings growth proved resilient in Q3, particularly in AI-linked sectors. Nova Ltd. (NVMI), for example, benefited from its role in semiconductor manufacturing for AI infrastructure, a trend Boston Trust Walden describes as "a defining force in 2025's economic landscape".

However, the fund's detractors highlight a critical lesson: even high-quality companies can falter if macroeconomic conditions erode consumer demand or disrupt supply chains. The case of Inspire Medical Systems, which downgraded its guidance due to product rollout delays as reported in the analysis, demonstrates how execution risks can compound in a high-interest-rate environment.

Conclusion: Balancing Conviction with Caution

The Wasatch U.S. Select Fund's Q3 2025 performance illustrates the dual-edged nature of small-cap investing. While its concentrated, active strategy can capture outsized gains in high-growth sectors, it also demands rigorous risk management to mitigate macroeconomic and sector-specific shocks. For investors, the takeaway is clear: in an era of fragmented growth and persistent inflation, high-conviction strategies must be paired with agility to adapt to rapidly shifting conditions.