Thrivent Small Cap Growth Fund: A Contrarian's Delight in Tariff Turbulence

The Thrivent Small Cap Growth Fund's 11.12% decline in Q1 2025—underperforming its Russell 2000® Growth Index benchmark by 118 basis points—has sent ripples through the small-cap growth universe. Yet, beneath the surface of tariff-driven volatility lies a compelling contrarian opportunity. For investors willing to look past near-term headwinds, this downturn exposes a rare entry point into a fund strategically positioned to capitalize on domestic policy tailwinds, undervalued sectors, and companies with secular growth moats.

Valuation Discounts: A Buyer's Market for Disciplined Growth

The Russell 2000® Growth Index now trades at a forward P/E of 18.4x, a 13% discount to its five-year average of 21.2x. This valuation contraction, amplified by fears of prolonged Federal Reserve rate hikes and trade tensions, has created fertile ground for bargain hunters.

The fund's underperformance was disproportionately tied to sectors like Information Technology (e.g., semiconductor firms grappling with supply chain disruptions) and Health Care (operational missteps at an ERP overhaul). However, these setbacks highlight the fund's risk management discipline, as it has already begun rotating capital away from tariff-exposed industries. Meanwhile, its Consumer Discretionary and Financials holdings—such as a factory-built housing company and an insurance brokerage—demonstrated resilience. These sectors, with domestic revenue exposure and pricing power, are now trading at attractive valuations.

Policy Tailwinds: A Small-Cap Growth Catalyst

The current administration's push to reduce regulatory burdens and accelerate tax incentives for domestic manufacturers is a tailwind uniquely favoring small-cap firms. Unlike their multinational peers, smaller companies with U.S.-centric revenue streams are less vulnerable to global trade wars. For instance, the recent Manufacturing Tax Credit Expansion Act targets industries like automation and data infrastructure—sectors Thrivent's portfolio has quietly been building positions in.

This policy backdrop aligns with historical patterns: small-cap growth stocks have historically thrived during periods of domestic fiscal stimulus, outperforming the S&P 500 by an average of 12% in the 12 months following declines exceeding 10%.

Sector Resilience: Where the Fund is Winning

While tariffs battered semiconductor and healthcare holdings, the fund's strategic pivots have shielded its downside. In Consumer Discretionary, a factory-built housing firm capitalized on the U.S. housing affordability crisis, maintaining stable gross margins as consumers shifted to cost-effective solutions. Similarly, an insurance brokerage in the fund's Financials allocation delivered double-digit organic revenue growth, leveraging its niche dominance and strong balance sheet.

These successes underscore a broader thesis: domestic-facing small caps with secular demand drivers—such as automation, healthcare innovation, or housing affordability—are faring better than their globally exposed peers. Thrivent's focus on companies with AI-driven innovation (e.g., data infrastructure providers) and pricing power positions it to capture the next wave of growth.

The Contrarian Play: Timing and Triggers

The key question is whether this downturn is a buying opportunity or a warning sign. Historical data favors the former. The Russell 2000® Growth Index has rebounded sharply after periods of prolonged underperformance, with average 12-month gains of 12% following declines exceeding 10%. Meanwhile, the fund's active management—de-risking tariff-exposed sectors and doubling down on domestic leaders—aligns with this recovery playbook.

Investors should monitor two triggers:
1. Fed Rate Hike Trajectory: A pause or reversal in rate hikes would alleviate pressure on small-cap valuations.
2. Trade Negotiations: A thaw in U.S.-China tariff disputes could lift sentiment for cyclical sectors, reducing overhangs.

Investment Recommendation

The Thrivent Small Cap Growth Fund is a buy at current levels, provided investors adopt a 12–18-month horizon. Its underperformance has compressed valuations, while its sector pivots and policy-aware strategy position it to capitalize on domestic growth tailwinds. Focus on holdings with domestic revenue exposure (e.g., factory-built housing), AI-driven innovation (e.g., data infrastructure), and strong balance sheets (e.g., niche financial services).

Avoid overconcentration in cyclical sectors until tariff risks subside, but remain bullish on the fund's core thesis: small-cap growth stocks are rarely this cheap when the U.S. economy is structurally favoring domestic reinvestment.

In short, Q1's turbulence is less a verdict on the fund's quality and more a setup for a contrarian rebound.

Final Note: Always consider your risk tolerance and consult with a financial advisor before making investment decisions.