Touchstone Mid Cap Value Fund: Q3 2025 Performance and Risk Assessment

Building on recent momentum, Touchstone Mid Cap Value Fund delivered a 5.35% return in Q3 2025, matching the Russell Midcap Value Index's exact performance. Its 89% active share-a metric indicating substantial deviation from the benchmark-demonstrates the fund's reliance on concentrated stock selection rather than passive indexing. While this approach generated parity with the index, it contrasts sharply with Kennedy Capital Mid Cap Value Fund's 351 basis-point underperformance in the same period (2.67% vs. 6.18%). Kennedy's shortfall stemmed from poor stock choices in Financials and Energy, despite gains in Consumer Staples and Real Estate.

The divergence reflects broader challenges in value investing amid speculative AI-driven small-cap rallies, which penalized funds with limited tech exposure. Touchstone's strategy-focusing on high-quality, undervalued companies-faces headwinds from market skepticism toward traditional business models. While its $561 million portfolio retains credibility through active management, volatility remains a concern. The fund's dependence on concentrated bets increases sensitivity to sector-specific shocks, particularly as rate-cut-driven rallies favor disruptive sectors over traditional value. Investors should note that past performance, while impressive in matching the index, does not guarantee future results.

Value Strategy Execution and Portfolio Dynamics

This section examines the mechanics and risks inherent in the Touchstone Mid Cap Value Fund's approach.

The fund relies on five distinct valuation screens to identify mid-cap companies it deems mispriced relative to their fundamental worth, combined with in-depth fundamental analysis by managers at Leeward Investments. This systematic screening process aims to build a portfolio significantly different from its benchmark, evidenced by the 89% active share reported in June 2025, meaning the fund's holdings deviated substantially from the Russell Midcap Value Index at that time. This high degree of divergence underscores the strategy's commitment to its value thesis rather than passive indexing. However, Morningstar's analysis from April 2025 noted this active approach hasn't yet yielded a clear competitive advantage, describing the fund's overall performance as merely average.

Portfolio construction reflects the strategy's focus. Holdings are concentrated, with the top 10 positions accounting for 22.1% of assets as of September 2025. Sectors like technology, financial services, and industrials are prominently represented within this concentrated structure. A key driver of portfolio activity is the high turnover rate of 37%, indicating managers are actively buying and selling securities based on their value assessments. This frequent trading generates transaction costs that eat into returns. Furthermore, the constant reshuffling creates cash flow volatility within the fund, as selling securities generates cash that must be redeployed, potentially impacting performance if market timing is imperfect.

While the concentrated bets and high turnover aim to capitalize on identified value opportunities, these mechanics introduce friction. The significant transaction costs from the 37% turnover rate are a direct drag on performance. Coupled with the lack of a proven competitive edge highlighted by Morningstar, the strategy faces a challenge in consistently outperforming its benchmark after costs. Market volatility, a risk noted in the fund's earlier reporting, further tests the value thesis and adds pressure to the portfolio dynamics driven by high turnover and concentration.

Market Sentiment Pressures

Higher-for-longer interest rates and the Trump administration's tariff adjustments are creating significant market volatility in 2025, complicating investment decisions. Simultaneously, speculative trends in artificial intelligence and technology sectors are dominating investor sentiment, overshadowing more traditional value drivers. This environment particularly challenges mid-cap value strategies, which remain sensitive to near-term economic shifts despite their long-term valuation appeal.

Touchstone Mid Cap Value Fund's defensive approach highlights the sector's vulnerabilities, emphasizing patience and diversification amid slowing growth forecasts. The fund's strategy seeks to mitigate risks from the current monetary policy landscape by favoring fixed income allocations and global equity exposure to counterbalance overvalued U.S. stocks. This cautious posture reflects the broader sector's struggle to find stability under dual pressures of elevated rates and trade policy changes.

Meanwhile, Kennedy Capital's Q3 2025 performance underscores these challenges. The fund underperformed its benchmark by 351 basis points, with weak stock selection in Financials and Energy sectors directly opposing gains in Consumer Staples and Real Estate. While these defensive sectors rose 8% and 6% respectively during the quarter, their positive contribution was insufficient to offset broader weaknesses. Limited exposure to AI beneficiaries and market skepticism toward long-term business models in disruptive industries further constrained returns.

The current volatility demands heightened risk management. Both funds illustrate how growth sensitivity to interest rates and policy shifts can quickly erode value in traditional holdings. Portfolio repositioning efforts now focus on balancing near-term risks while maintaining fundamental investment principles, acknowledging that speculative tech flows and tariff-induced cost pressures may persist. Investors should remain cautious about sustained volatility and prepare for continued sector rotations as macroeconomic headwinds interact with evolving technological trends.

Regulatory and Operational Constraints

Despite prior resilience, the Touchstone Mid Cap Value Fund faces meaningful operational and regulatory headwinds that warrant caution. Its expense ratio sits at 0.84%, notably above the mid-cap value fund average of 0.72%, directly pressuring net returns for investors. This costlier structure becomes particularly problematic in a volatile environment where the fund delivered a sharp 2.0% single-day decline just before December 2025.

High portfolio turnover compounds these challenges. At 37%, the fund's annual trading rate is elevated, increasing transaction costs and potential capital gains taxes passed to shareholders. Morningstar's analysis explicitly flags this high turnover as a key risk factor, noting it heightens market sensitivity and contributes to the fund lacking a clear competitive edge in strategy or personnel. This operational churn suggests a lack of stability in holdings.

Broader political and economic risks further cloud the outlook. The fund's mid-cap value strategy operates within a U.S. economy showing resilience but facing significant policy uncertainty, particularly from shifting trade policies and tariff adjustments enacted by the Trump administration. These actions create market volatility that mid-cap stocks, the fund's core exposure, are especially sensitive to in the near term. While the fund's diversified approach aims to mitigate such risks, the combination of higher operational costs, volatile trading activity, and heightened sensitivity to tariff-induced economic shifts presents a challenging backdrop for outperformance. Investors should monitor how this specific operational profile withstands sustained policy turbulence.

Forward Positioning

Our cautious stance remains consistent: reduce exposure to non-AI speculative areas while prioritizing cash reserves as potential volatility entry points. The recent 2.00% one-day dip in mid-cap value funds underscores market sensitivity, particularly in higher-turnover strategies lacking differentiation. While Consumer Staples previously provided some offsetting stability, current discretionary spending uncertainty complicates that defensive role.

Portfolio construction must emphasize compliance discipline and cash buffers. The Kennedy fund's Q3 underperformance demonstrates how limited AI exposure and skepticism toward long-term business models can drag returns versus benchmarks. Though small-cap strength and Fed rate cuts drove broader gains, our strategy must avoid over-indexing on unproven disruptive narratives without clear cash flow validation.

High turnover rates remain a risk multiplier, especially when combined with sector concentration. We'll enforce stricter turnover thresholds and monitor portfolio rebalancing cycles weekly. Any AI-related positioning requires explicit cash flow justification and stress-tested downside scenarios, as evidenced by the fund's Financials selection weaknesses. Maintaining this disciplined approach aligns with our core principle: visibility decline triggers position reduction.