In the third quarter of 2025, financial markets experienced a notable upswing, continuing the positive momentum from the previous quarter. This recovery was largely driven by a renewed sense of optimism surrounding the potential for more accommodating monetary policies, strong corporate financial results, and generally positive investor sentiment. Small and mid-capitalization stocks showed particular strength, surpassing their larger counterparts, a trend attributed to anticipated interest rate reductions and an increased investor focus on domestic cyclical sectors.
Despite this broader market recovery, the Thornburg Small/Mid Cap Growth Fund’s I share class recorded a return of 5.46%, which was 527 basis points below the performance of its benchmark, the Russell 2500 Growth Index. This divergence highlights specific challenges or strategic positioning within the fund that led to its underperformance relative to the broader growth segment of the small and mid-cap market.
Understanding the Market’s Dynamics in Q3 2025
The third quarter of 2025 demonstrated a robust resurgence across financial markets, building on the recovery trend established in the late spring. This positive trajectory was underpinned by several key factors. Central to this optimism was the anticipation of an easing monetary policy, suggesting that central banks might adopt a less stringent approach to interest rates, which typically bodes well for equity markets. Alongside this, a series of strong corporate earnings reports indicated a resilient economic environment, providing a solid foundation for investor confidence. The combination of these elements cultivated a fertile ground for market growth, pushing indices higher and encouraging broader participation from investors. This period was characterized by a palpable sense of relief and renewed belief in the market’s capacity for sustained growth.
During this buoyant quarter, small and mid-capitalization equities distinguished themselves by outperforming large-cap stocks. This shift in performance was primarily fueled by expectations of impending lower interest rates, which tend to benefit smaller companies by reducing their borrowing costs and enhancing their growth prospects. Furthermore, there was a noticeable increase in investor appetite for domestic cyclical sectors. This preference suggests a belief in the continued strength of the domestic economy and a rotation towards companies whose fortunes are closely tied to economic cycles. The Federal Reserve’s long-anticipated decisions on monetary policy played a crucial role in shaping market expectations and influencing asset allocation strategies, particularly favoring these segments of the equity market. The sustained recovery thus reflected a complex interplay of macroeconomic factors and evolving investor preferences.
Thornburg Fund’s Performance and Investment Context
In the third quarter of 2025, the Thornburg Small/Mid Cap Growth Fund, specifically its I share class, reported a return of 5.46%. This figure, while positive, marked a significant underperformance when compared to its designated benchmark, the Russell 2500 Growth Index, trailing by a notable 527 basis points. This disparity suggests that the fund’s investment selections or strategic allocations within the small and mid-cap growth universe did not fully capitalize on the market’s upward trajectory during this period. The underperformance warrants a closer examination of the specific holdings or sector exposures that might have contributed to this outcome, especially given the overall strength observed in the broader small and mid-cap segments of the market.
The broader market context for the quarter was one of significant gains, extending a recovery phase that had commenced in the late spring. This rally was largely propelled by a confluence of positive developments: renewed optimism regarding an easing of monetary policy, robust corporate earnings reports that exceeded expectations, and a generally resilient investor sentiment that encouraged risk-taking. Against this backdrop, the fund’s lagging performance indicates that while the market environment was favorable for growth-oriented smaller companies, Thornburg’s specific portfolio composition or investment thesis may have diverged from the segments that experienced the strongest appreciation. This highlights the importance of understanding the micro-level drivers of fund performance within a dynamic macroeconomic setting, where even broad positive trends can mask varying returns across different investment strategies and individual securities.
