Small/Mid Cap Growth Quarterly Commentary

Quarterly Review and Commentary

The SMID Growth strategy returned 0.2% (net of fees) for the quarter. More broadly, the S&P 500®, on the back of mega-cap tech stocks, rose 4.3%. and the Nasdaq jumped 8.5%. Stock selection and a healthy overweight to Health Care was the largest positive contributor to returns, while our lone stock in Consumer Discretionary—Pool Corporation—was the largest detractor.

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We are seeing signs of irrational capital allocation because of boom demand for AI chips. This is not unusual. Financial markets love new and exciting stories. However, the size and direction of the capital flows in the current environment are historically significant. Consider: AI-bellwether Nvidia’s (NVDA) market capitalization increased $1 trillion, from $2 to $3 trillion, in just 23 trading days, while stocks of NVDA’s clients traded flat to down. This assumes NVDA continues to realize very large future profits from its clients, while these same clients will not earn a return on their AI capital expenditure. This is not a rational outcome.

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Our view is that this capital expenditure boom ends in two ways. Either NVDA’s clients realize productivity and revenue gains from their massive AI investments, or they don’t. If they do, we believe their stocks will deliver attractive returns. If they don’t, they will stop investing in AI infrastructure, and NVDA will struggle to maintain its $3 trillion market valuation. If that is the eventual outcome, we suspect volatility will swiftly return, the market will retreat from its highs, and future returns will be muted as investors’ risk tolerance normalizes.

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Volatility – The Waiting is the Hardest Part

Risk takes many forms in portfolio management. Stock price volatility—particularly over the short term—can prey on behavioral biases. Market cycles, where past success produces future complacency over risks, virtually guarantee this. For example, the commercial success of a product or service draws competitors looking to take the owner’s profit. This usually works out well for consumers in the form of more choices at lower prices, but it can be costly for shareholders. To be successful over time, investors must have plans for dealing with this.

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Torray Investment Partners (TIP) has developed a volatility playbook that we have used over multiple decades and different market cycles. First, we focus almost exclusively on owning TIP-Quality businesses (see our definition of quality HERE). Owning the right businesses is our first defense against a poor investment outcome. Next, we invest in these businesses only when they trade at what we believe are fair valuations. If we find a TIP-Quality business but conclude its too expensive, we will put it on our “Focus List,” and wait patiently for an attractive entry point. Finally, we actively fine-tune position sizes based on multiple factors, including stock price volatility. Our objective is to opportunistically upgrade the overall risk and reward profile of our concentrated portfolios. Our playbook served clients well during the bear markets of ’01, ’08, and ’22. We believe it will again over future market cycles.

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Portfolio Activity

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Purchases

We purchased CCC Intelligent Solutions (CCCS) during the quarter in the SMID Growth strategy. CCS sells mission-critical software to automobile insurance companies and their repair shop partners. The company’s CCC ONE® platform combines key business operations and workflows into a single solution to simplify operations, improve repair quality, and drive more business. As the leading technology platform in the space, the company enjoys multiple layers of competitive advantages that position it to drive higher revenue per customer and win. We believe CCCS can sustain above-average growth over our long-term investment horizon. Notably, the addition of CCCS helps improve the overall diversification profile of the portfolio.

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Sales

We did not sell any positions during the quarter.

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Best and Worst Performers in the Quarter

We purchased CCC Intelligent Solutions (CCCS) during the quarter in the SMID Growth strategy. CCS sells mission-critical software to automobile insurance companies and their repair shop partners. The company’s CCC ONE® platform combines key business operations and workflows into a single solution to simplify operations, improve repair quality, and drive more business. As the leading technology platform in the space, the company enjoys multiple layers of competitive advantages that position it to drive higher revenue per customer and win. We believe CCCS can sustain above-average growth over our long-term investment horizon. Notably, the addition of CCCS helps improve the overall diversification profile of the portfolio.

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Why Invest In Torray Small/Mid-Cap Growth Strategy?

Disclosures

This commentary is for informational purposes only and should not be viewed as a recommendation to buy or sell any security. There is no guarantee that the views expressed will come to pass. Torray Investment Partners LLC is an independent registered investment adviser. Registration of an investment adviser does not imply any level of skill of training. Past performance is not indicative of future results. For additional information about Torray Investment Partners LLC, including fees and services, please contact us or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov).