In the third quarter of 2025, the small-growth segment of the market experienced a significant surge, predominantly fueled by speculative interest in companies with minimal or no earnings, and in some instances, no revenue streams at all. Despite this broad market strength, the Institutional Class shares of the Macquarie Small Cap Growth Fund did not meet the performance of its benchmark, the Russell 2000 Growth Index. Looking ahead, current macroeconomic conditions appear to be supportive of the small-cap growth sector, indicating potential for a more robust performance in the coming period.
During the three-month period ending September 30, 2025, the small-growth category demonstrated considerable upward momentum. This was characterized by a notable increase in the valuation of businesses that traditionally would be considered higher risk due to their lack of established profitability or even initial sales figures. This trend highlights a broader market appetite for speculative investments, suggesting investors were willing to overlook fundamental financial indicators in pursuit of rapid growth opportunities. Such conditions can present a challenging environment for funds that prioritize more established, quality growth companies.
The Macquarie Small Cap Growth Fund's strategy typically involves identifying companies with strong long-term growth potential backed by sound business models. In a quarter dominated by speculative rallies in less fundamentally solid enterprises, this disciplined approach may have contributed to the fund's relative underperformance compared to the benchmark. The Russell 2000 Growth Index, which the fund measures itself against, encompasses a wider range of small-cap growth stocks, including those that led the speculative charge.
Despite the recent quarter's performance, the underlying economic landscape provides a positive backdrop for small-cap growth investments. Factors such as interest rate expectations, consumer spending patterns, and innovation cycles are generally conducive to the expansion of smaller, dynamic companies. These conditions could eventually shift market focus back towards companies with sustainable growth trajectories, aligning more closely with the Macquarie Fund's investment philosophy.
Ultimately, the third quarter of 2025 showcased a bifurcated market within the small-growth sector: a strong speculative rally coexisting with more measured growth in established companies. While the Macquarie Small Cap Growth Fund's Institutional Class shares lagged behind its benchmark during this period, the broader macroeconomic environment suggests an optimistic outlook for quality small-cap growth stocks. The expectation is that market dynamics will eventually favor companies with solid fundamentals, allowing the fund's investment strategy to demonstrate its long-term value.
