During the first quarter of 2026, the Virtus KAR Small-Cap Growth Fund faced a challenging period, delivering a return of -9.88% for its Class I shares. This performance lagged behind its benchmark, the Russell 2000® Growth Index, which saw a more modest decline of -2.81%. This divergence in performance unfolded in a dynamic market environment where small-cap equities, generally, demonstrated stronger returns compared to their large-cap counterparts. This shift was largely attributed to investors rotating capital out of what were perceived as "crowded trades" in the large-cap segment. In response to these market conditions, the fund made strategic adjustments to its holdings, acquiring new positions in BBB Foods, GigaCloud Technology, and IRadimed, while simultaneously divesting its stakes in OneStream and Rightmove.
Market Leadership Shifts as Small-Caps Outperform Large-Caps
In the initial three months of 2026, a notable realignment occurred in market leadership. Small-cap stocks, as measured by the Russell 2000® index, demonstrated superior performance compared to large-cap stocks. This shift was primarily fueled by investors moving away from highly concentrated positions in large-cap companies. The Virtus KAR Small-Cap Growth Fund, despite its small-cap focus, did not fully capitalize on this trend, reporting a Class I return of -9.88%, significantly below the Russell 2000® Growth Index's -2.81% for the quarter. This period saw the fund strategically adding BBB Foods, GigaCloud Technology, and IRadimed to its portfolio, indicating an active management approach to navigate the evolving market landscape. Concurrently, positions in OneStream and Rightmove were liquidated as part of the fund's ongoing portfolio rebalancing efforts.
This quarter's results underscore the intricate nature of market dynamics, even within seemingly favorable segments. While small-cap stocks collectively outperformed, individual fund performance can still be influenced by specific stock selections and sector allocations. For investors, this highlights the importance of thorough due diligence and understanding the underlying strategies of actively managed funds, especially during periods of significant market rotation. The fund's decisions to acquire new holdings like BBB Foods and GigaCloud Technology suggest a focus on identifying growth opportunities within specific niches, even as it shed positions in companies like Rightmove, possibly in response to changing valuations or risk profiles. This continuous portfolio adjustment reflects the active management's attempt to adapt to market signals and capitalize on emerging trends.
