The Touchstone Small Cap Value Fund, specifically its Class A Shares (Load Waived), recorded a period of underperformance against its designated benchmark, the Russell 2000\u00ae Value Index, during the third quarter of 2025. This divergence in performance was largely influenced by prevailing market dynamics, which showed a strong inclination towards investments characterized by elevated volatility, lack of profitability, smaller market capitalization, and lower returns on equity. Furthermore, the fund's specific sectoral weightings played a role in this outcome.
The investment philosophy underpinning the Touchstone Small Cap Value Fund is rooted in a traditional value-oriented approach. This methodology systematically seeks out companies that are believed to be trading at a discount relative to their inherent worth. The fund employs a stringent analytical framework, incorporating five distinct valuation criteria to pinpoint these attractively priced opportunities in the market. This disciplined process is central to its strategy, aiming to uncover hidden value even amidst challenging market conditions.
Reflecting on the factors contributing to the recent underperformance, it became evident that the market's heightened appetite for risk, favoring speculative assets over established value plays, significantly impacted the fund's relative returns. The preference for companies exhibiting high volatility, those not yet generating earnings, smaller enterprises, and businesses with a low return on equity, contrasted sharply with the fund's value-centric holdings. Additionally, the strategic allocation across different economic sectors did not align optimally with these dominant market trends, leading to a shortfall compared to the benchmark.
As the investment landscape transitions into the fourth quarter, the Touchstone Small Cap Value Fund has strategically adjusted its portfolio. A notable overweight position has been established in the Industrials sector, indicating a conviction in the potential of companies within this segment. Conversely, the fund has adopted a significant underweight stance in Communication Services, suggesting a more cautious outlook on this sector. These adjustments are a testament to the fund's active management approach, continually re-evaluating market conditions and re-positioning to capture value and manage risk.
The investment team at Touchstone Investments remains committed to its core principles of identifying fundamentally sound companies at attractive valuations. Despite the recent quarter's challenges, the focus continues to be on rigorous fundamental analysis and disciplined portfolio construction. The ongoing adjustments in sector allocation are a direct response to evolving market signals, aiming to navigate future periods with an eye towards long-term value creation for its investors.