Small-Cap Managers Lag Q3 Rally, Detail Quality Tilt and AI-Linked Standouts

The letters attribute underperformance to a Fed-fueled surge that favored lower-quality shares, with portfolios refocused on durable businesses tied to AI, IoT and infrastructure.

Overview

Wasatch reported a -3.17% Q3 return versus a 12.19% gain for the Russell 2000 Growth Index as small caps rallied on a Federal Reserve rate cut, and Riverwater also said its strategy trailed the benchmark despite solid absolute results.
Wasatch sold Inspire Medical Systems after an August guidance cut and delays to the U.S. rollout of the next‑generation Inspire V device, while citing growing concerns about GLP‑1 drugs’ impact on the addressable market.
Medpace was Wasatch’s top contributor after strong revenue and earnings and a full‑year guidance raise, and AI-linked names Nova and Fabrinet also helped performance.
Riverwater exited Crocs, Iridium and Vestis on execution, growth and balance‑sheet concerns, and it initiated a smaller position in Preformed Line Products to gain exposure to utility and communications infrastructure.
Riverwater highlighted Modine’s data‑center cooling demand from AI spending, Digi’s shift to subscription solutions that lifted recurring revenue to 27% of total, and Belden’s networking portfolio, while Wasatch’s micro‑cap letter flagged Willdan’s strong results and guidance raise tied to utility spending.