New York — U.S. stock markets experienced a notable rally during the third quarter, buoyed by a recent interest rate cut from the Federal Reserve and mixed economic data suggesting resilience in the nation’s financial landscape. In this context, the Russell Midcap® Growth Index managed a gain of 2.78%, while the Wasatch U.S. Select Fund—Investor Class saw a decline of 1.93%.

Several stocks held by the fund underperformed, mainly driven by a few companies reporting slower revenue growth. The concentrated nature of the fund means that these lagging stocks significantly influenced overall performance. Investors are currently weighing whether these downturns are primarily a result of broader economic conditions or heightened competitive threats.

To better assess the long-term viability of its investments, the fund employs a strategy involving critical questions tailored for each company in the portfolio. These inquiries aim to yield insightful data that could alter investment positions if pertinent information surfaced. This method facilitates a forward-looking approach, allowing fund managers to gauge where a company could be in five to ten years.

Despite reviewing their critical questions, the fund continued to hold most of its underperforming stocks, with only a few divested during the quarter. This indicates a belief that the fundamental growth thesis for many of these companies remains intact, despite temporary setbacks.

Another factor contributing to the fund’s poor showing was the market’s current preference for lower-quality stock investments, a divergence from the fund’s focus on high-quality growth companies. This trend presents challenges, as the fund seeks to target businesses with durable growth prospects. While the timing of the market’s recalibration is uncertain, history suggests that periods favoring lower-quality stocks tend to be brief, with high-quality firms eventually regaining dominance.

Among the fund’s notable laggards was BellRing Brands, known for its Premier Protein products. After a key retail partner expanded product offerings to include more competitors in the protein shake space, BellRing’s stock value dropped significantly. However, following discussions with management and further analysis, fund managers remained optimistic about the company’s market position and long-term growth potential.

Shift4 Payments also contributed to the fund’s declines. The company, which provides payment processing solutions, saw its fundamentals solidify with strong revenue growth. Yet, investor concerns arose amid a softening economic backdrop and growing skepticism regarding a new acquisition, which added substantial debt to the balance sheet. Despite turbulence, fund managers expressed confidence in Shift4’s management team to navigate integration challenges.

In contrast, Medpace Holdings emerged as a leading contributor to the fund’s performance, buoyed by solid earnings and revenue growth that resulted in an upward revision of its annual guidance. The firm’s resilience amid a slowdown in the biotech funding cycle underscores its value proposition.

Fabrinet and Nova Ltd. also exceeded expectations, aided by rising demand linked to technological advancements. Both firms are positioned well to benefit from the ongoing complexity of semiconductor manufacturing, particularly in light of artificial intelligence developments.

As the quarter concluded, Wasatch fund managers acknowledged their disappointment in performance but affirmed their commitment to investment principles. The team emphasized the importance of adhering to their philosophy and methodology rather than chasing prevailing market trends. Looking ahead, they remain optimistic about the long-term prospects of their portfolio, buoyed by strong earnings growth across the majority of their holdings.

In closing, fund managers expressed gratitude for the trust placed in them to manage client assets and highlighted their focus on delivering sustained value for the future.