In the fourth quarter, global equity markets showed positive growth, with Europe leading and Emerging Markets closely following. Large-cap stocks generally outperformed small-cap stocks across most markets. The United States and China extended their trade agreement for another year, though ongoing geopolitical concerns, such as tariffs, continued to influence market dynamics. TimesSquare Capital Management's U.S. Small Cap Growth Strategy achieved a gross return of 3.70% in Q4, surpassing the Russell 2000 Growth Index's 1.22%. This strong performance was largely attributed to significant contributions from the Information Technology and Industrial sectors, which had faced considerable challenges in the preceding quarter.
TimesSquare Capital Management's approach in the fourth quarter involved a dynamic rebalancing of its portfolio, reacting to both market shifts and individual company performance. The strategy yielded favorable results by capitalizing on sectors that showed renewed strength, while carefully managing exposure to those that had previously underperformed. This active management, combined with a clear focus on emerging themes, allowed the fund to navigate a complex global economic environment successfully and deliver substantial returns for its investors.
Strategic Portfolio Adjustments and Key Performers
The fourth quarter saw TimesSquare Capital Management implementing strategic adjustments to its U.S. Small Cap Growth portfolio, focusing on optimizing returns through a blend of divestment and increased allocation. Companies such as Boot Barn, Warby Parker, and Legence, which had experienced substantial rallies, saw their positions trimmed or exited to lock in gains. Conversely, the firm increased its exposure to companies like Uranium Energy, Ollie's, and Stevanato Group, recognizing their undervaluation and promising growth prospects. This proactive management ensured that the portfolio remained agile, adapting to market signals and company-specific developments to maintain a competitive edge. The Information Technology and Industrial sectors were particularly instrumental, transitioning from weakness in the third quarter to become significant contributors to the fund’s robust performance in Q4.
A notable highlight in the portfolio's performance was Boot Barn, which not only increased its guidance for the upcoming fiscal year but also announced plans for new store openings, projecting sustained growth without anticipating disruptions from price increases slated for mid-2026. Ceribell, a leader in portable electroencephalogram (EEG) technology, also significantly boosted the portfolio, with its share price surging by 91% following impressive financial results and an upgraded sales outlook. Additionally, Axogen, Inc., a developer of technologies for peripheral nerve regeneration, and JFrog, a software supply chain management firm, contributed positively, reflecting the fund's diversified yet growth-oriented approach. These individual successes underscore the effectiveness of TimesSquare Capital Management’s fundamental research and strategic investment decisions in a fluctuating market.
Forward-Looking Investment Themes and Economic Outlook
Looking ahead, TimesSquare Capital Management is strategically positioning its portfolio around several forward-looking themes to capitalize on anticipated market shifts and technological advancements. A primary focus is on the widespread adoption of artificial intelligence (AI), identifying companies that are either direct beneficiaries or integral enablers of this transformative technology. Concurrently, the firm is emphasizing domestic energy security, investing in entities that contribute to national energy independence and sustainable practices. The overall investment philosophy remains centered on companies demonstrating strong management, sustainable growth models, and resilience against economic headwinds. This proactive stance ensures that the portfolio is aligned with long-term trends and potential areas of outperformance, safeguarding against unforeseen market volatility while maximizing growth opportunities.
The economic landscape in the coming periods will be closely monitored, with particular attention to potential impacts from Supreme Court decisions regarding tariffs, which could significantly alter trade dynamics and supply chains. Furthermore, shifts in fiscal policy will be a critical factor, as government spending and taxation can influence corporate profitability and consumer behavior. These macroeconomic elements, combined with ongoing geopolitical developments, necessitate a flexible and informed investment strategy. By staying attuned to these overarching themes and policy changes, TimesSquare Capital Management aims to adapt its portfolio effectively, ensuring continued strong performance and diligent risk management in an evolving global economy, further solidifying its position as a discerning investor in the small-cap growth space.
