Market Observations & Portfolio Commentary

Mid Cap – 2025 vs. RMC

 

Full Year Market Update 

U.S. equities posted strong gains in 2025, marking a third consecutive year of double-digit returns, with the Russell 3000 Index rising 17.2%. The year was shaped by robust earnings growth, continued AI enthusiasm driving technology leadership, and incrementally more supportive monetary policy. However, the market navigated significant volatility, particularly during the spring tariff uncertainty when the S&P 500 fell nearly 19% before recovering. The Federal Reserve reduced rates by 75 basis points in the second half of the year, responding to moderating growth and signs of labor market softening while inflation remained above target. Trade policy uncertainty and tariff developments contributed to periodic volatility, though markets generally proved resilient as implementation timelines shifted.

Like recent years, equity market leadership was again concentrated in Large Cap Growth companies, particularly within technology-oriented areas tied to artificial intelligence, as the equal-weight S&P 500 meaningfully trailed its cap-weighted counterpart. Stylistically, Growth led Value for the year, and Large Caps outperformed Small Caps. Sector performance was mixed, with cyclical leadership led by Communication Services, Technology, and Industrials, while more defensive areas lagged. Among market factors, Growth, Volatility, and Size factors posted the strongest relative returns. Momentum also helped. The Quality and Yield factors were large headwinds. The Value factor was mixed.

 

Key Performance Takeaways for the Year

• The London Company Mid Cap portfolio returned 5.8% (5.1% net) year-to-date vs. a 10.6% increase in the Russell Midcap Index. Both stock selection and sector exposure were headwinds to relative performance.

• For the year, our Mid Cap portfolio produced solid absolute returns, but it trailed its benchmark and came up short of our 85-90% upside participation expectations. The portfolio played strong defense amid the volatility in Q1 and it gained ground in the final months as factors shifted our way, but this was more than offset by the high beta, low quality headwinds that dominated much of the year. While the Index is broader down cap, our structural underexposure to the largest, high-momentum names in the Russell Midcap was a material headwind in 2025. 

• In our view, this is a market where discipline matters more than bold forecasts, and portfolios should be prepared for a wider range of possible outcomes. We believe our Quality-at-a-Reasonable-Price approach may offer participation in market upside while providing the differentiation that may matter most if volatility increases or leadership shifts.

 

Top 3 Contributors to Relative Performance 

• Dollar Tree, Inc. (DLTR) – DLTR was a top performer this year after completed the divesture of the Family Dollar business, removing a long-standing drag on growth, margins, and returns. The stock’s re-rating appropriately reflects higher quality fundamentals and a cleaner story for stand-alone DLTR. We see significant optionality for value creation as the company executes its multi-price strategy and launches a long-awaited store renovation program with attractive expected returns.

• AerCap Holdings (AER) – AER shares performed well all year after reporting solid quarterly results. We believe the company is sitting in the enviable position of owning the largest portfolio of aircraft in a seller’s market. The insurance recoveries during the year were a nice windfall, which was used to repurchase shares. The company should be able to continue growing book value per share via large purchase leasebacks or M&A, given its historically low leverage.

• Somnigroup International Inc. (SGI) – SGI continues to perform well despite weak industry demand. The approval of the Mattress Firm deal during the first quarter was a major development, offering long-term benefits through vertical integration and enhancing its competitive position. Valuation remains compelling and our investment thesis is supported by robust free cash flow generation, strong brand equity, and solid management execution.

 

Top 3 Detractors from Relative Performance 

• Copart, Inc. (CPRT) – CPRT shares weakened in the second half as insurance-related volumes declined, driven by rising underinsurance. Despite this, CPRT continues to generate higher ASPs and strong margins due to its superior auction liquidity and value-added services. With lower future capex needs, improving logistics efficiency, and a widening competitive gap, we continue to view CPRT as well positioned for attractive long-term value creation as insurance coverage normalizes.

• Pool Corporation (POOL) – POOL underperformed for the year as negative sentiment toward discretionary home improvement and elevated interest rates limited a recovery in new pool construction volumes. While volumes were largely flat, inflation remained a tailwind for earnings, and we believe margins are near trough levels. With construction activity stabilizing, POOL’s strong competitive position supports a favorable setup as end-market conditions normalize.

• Entegris, Inc. (ENTG) – ENTG lagged during the year with more pronounced weakness in the second half. Management extended the recovery timeline for semiconductors due to sluggish demand in older technologies and the timing of new nodes. That said, ENTG continues to benefit from the higher amount of materials needed for new technologies and is winning business as its products deliver faster time to yield. We remain attracted to the industry’s high barriers to entry, limited competitors, and high switching costs.

 

Sector Influence

We are bottom-up stock pickers, but sector exposures influenced relative performance as follows:

• What Helped: Overweight Industrials (a better performing sector) & underweight Energy (a weaker performing sector)

• What Hurt: Overweight Consumer Staples (a weaker performing sector) & underweight Communication Services (the best performing sector)

 

Portfolio Characteristics & Positioning 

We believe the Mid Cap portfolio is positioned for long-term durability and possesses the fundamental ingredients that stand the test of time: wide moats, sustainably high returns on capital, strong cash flow generation, low leverage ratios, and trading at a reasonable valuation. As a corporate debt maturity wall approaches and the cost of that capital stays elevated, we believe companies with strong balance sheets and the ability to self-fund their operations could have a structural advantage in 2026 and beyond. In an environment of possibly lower returns and greater volatility, we believe the Mid Cap portfolio offers an attractive option for equity investors.

Source: FactSet

 

Looking Ahead

As we move into 2026, the economic and policy backdrop remains characterized by a mix of support and uncertainty. On the positive side, corporate earnings trends have remained better than expected, consumer activity has shown resilience, and ongoing Fed rate cuts combined with fiscal stimulus measures may continue to support growth. At the same time, late-cycle dynamics are becoming more evident. Labor market softening, affordability pressures, and persistent housing weakness underscore the uneven nature of growth. Trade and tariff policy remain fluid, and elevated complacency leaves markets vulnerable to adverse surprises. Against this backdrop, economic and inflation data may remain volatile, increasing the likelihood of episodic market dislocations. Despite resilient earnings trends and elevated hyperscaler capital spending, we believe caution is prudent given these crosscurrents.

From an equity market perspective, strong headline returns have masked growing dispersion beneath the surface. Leadership has remained narrow and valuation risk increasingly concentrated, raising the possibility that company-specific risks could take on broader significance. Periodic risk-on rallies, particularly among high-beta and lower-quality segments, have contributed meaningfully to recent performance, but history suggests such episodes are rarely durable. We believe the environment is becoming more conducive to broader leadership and a return to fundamentals, where earnings growth, dividends, and balance-sheet strength matter more than valuation multiple expansion. As volatility rises, downside protection is likely to be driven by companies with high and stable returns on invested capital, conservative leverage, and reasonable valuations. Our portfolios remain anchored in these attributes, which we believe offer a more resilient path through shifting market regimes and help clients participate in long-term wealth creation while managing downside risk.

 

Annualized Performance 

As of 12/31/2025

Inception date: 3/31/2012. Performance is preliminary. Subject to change. Past performance should not be taken as a guarantee of future results. Net of fee returns are calculated net of an annual model management fee of 0.75%. Please see the disclosure notes found on the bottom of the page.