This report summarizes the performance of the Osterweis Opportunity Fund during the third quarter of 2025, detailing its investment strategy and market outlook. Despite a robust market driven by speculative small-cap growth, the fund achieved a 5.14% gain, prioritizing fundamental strength and valuation discipline over speculative trends. The firm anticipates a market transition where growth will broaden beyond high-risk assets to include companies with proven sales and earnings, particularly as AI innovations trickle down to smaller enterprises. This strategic patience reflects their long-term investment philosophy and commitment to identifying high-quality, reasonably valued small-cap companies poised for sustainable growth.
Osterweis Capital Management Reports on Q3 2025 Performance and Market Trends
San Francisco, California – Osterweis Capital Management, a distinguished investment firm, has released its comprehensive report on the performance of its Opportunity Fund for the third quarter of 2025. James Callinan, CFA, Chief Investment Officer of Small Cap Growth, provided insights into the fund's strategy, portfolio attribution, and future market expectations.
During the third quarter, the broader market experienced a favorable period, characterized by strong corporate earnings and resilient economic fundamentals. The Federal Reserve's decision to cut interest rates by 25 basis points further stimulated both equity and bond markets. The Russell 2000 Growth Index, a benchmark for small-cap growth stocks, recorded an impressive 12.2% return, marking its second consecutive quarter of double-digit gains. This performance outpaced the S&P 500, which yielded an 8.1% return.
However, the significant gains within the Russell 2000 Growth Index were largely fueled by highly speculative companies lacking strong fundamentals, including unprofitable entities and those with elevated price-to-earnings ratios. Many of these surged due to short squeezes and thematic hype, a trend Osterweis Capital Management cautiously avoided.
The Osterweis Opportunity Fund posted a solid 5.14% gain for the quarter. While this performance lagged the Russell 2000 Growth Index, the firm attributed this to its disciplined approach, which eschews speculative ventures such as certain biotechnology firms and quantum computing companies. The fund maintains a long-standing commitment to valuation discipline and profitability, principles that have historically delivered substantial outperformance over the long term.
Portfolio Highlights and Challenges
Security selection was a primary factor in the fund’s relative underperformance, particularly in the Health Care, Consumer Discretionary, and Information Technology sectors. Conversely, holdings in Consumer Staples, Industrials, and Real Estate demonstrated strong performance, though not enough to offset the laggards.
In Health Care, PROCEPT BioRobotics (PRCT) was a notable detractor, experiencing a downturn following a C-suite transition. Despite initial investor concerns, the appointment of industry veteran Larry Wood as CEO is viewed positively by Osterweis, with expectations for a robust Q3 performance. Artivion (AORT), a medical device company, emerged as a top contributor in this sector, driven by strong Q2 results and accelerating sales of its Onyx heart valve due to compelling clinical data.
In Consumer Discretionary, Duolingo (DUOL) negatively impacted the portfolio due to stalled user growth and concerns over management's subscriber targets. Consequently, Osterweis exited its position. Boot Barn (BOOT), a Western wear retailer, was a significant contributor, reporting strong Q2 results and raising full-year guidance. The position was exited after its market capitalization surged, realizing anticipated upside.
Information Technology experienced a bifurcation, with strong performance in semiconductors contrasted by weakness in traditional software. Rambus (RMBS), a high-performance semiconductor provider, was a leading contributor, benefiting from a 43% year-over-year product revenue growth and surging demand from AI inference workloads. Conversely, Monday.com (MNDY) was a detractor, as its stock declined following a softer growth outlook and reduced customer acquisition due to Google's AI-driven algorithm changes, leading to the fund’s exit from the position.
Consumer Staples proved to be a relative strength, with Vital Farms (VITL), an ethical egg and dairy producer, delivering strong results and a raised full-year guidance. Industrials also performed well, with CECO Environmental (CECO), a water and contaminant treatment equipment provider, showing robust Q2 results driven by significant sales and order growth, including large power infrastructure projects. Trex Company (TREX), a composite decking leader, faced headwinds from unfounded rumors of competitor discounts, but Osterweis remains confident in its investment.
Market Outlook
Looking ahead, Osterweis Capital Management anticipates a shift away from the recent speculative fervor in small-cap growth. They foresee a broadening rally that will favor companies demonstrating tangible sales and earnings growth. Historically, major technological shifts, such as the advent of mobile phones, e-commerce, and now artificial intelligence, first impact large-cap markets before extending to small-cap companies. This trend is already in motion, as smaller, innovative firms begin to harness AI for specialized applications.
The firm also believes that a more accommodating Federal Reserve policy will continue to support small-cap stocks. Osterweis Capital Management remains dedicated to diligently seeking out high-quality, reasonably valued small-cap companies with substantial potential for organic, rapid growth.
The unwavering confidence of their clients in their management is deeply appreciated.
The meticulous approach taken by Osterweis Capital Management in navigating the volatile small-cap growth market provides a valuable lesson for investors. Their unwavering commitment to fundamental analysis and valuation discipline, even when faced with short-term underperformance relative to speculative rallies, underscores the importance of a long-term perspective. In an era dominated by market hype and thematic investments, their strategy serves as a powerful reminder that sustainable growth often stems from sound financial health and proven business models. As AI continues to reshape industries, identifying companies that genuinely leverage these innovations, rather than simply riding the speculative wave, will be crucial for sustained investment success. This report not only informs but also educates, highlighting the enduring value of patience and prudence in investment management.