Navigating the Small-Cap Seas: A Look Inside the Touchstone Small Company Fund's Q3 2025 Journey

Ah, the world of small-cap investing! It’s often a thrilling, sometimes volatile, journey, isn't it? Q3 2025 proved to be no exception, presenting a unique set of challenges and opportunities for those brave enough to venture into this segment of the market. Today, we're going to take a really close look at how the Touchstone Small Company Fund navigated these waters, reviewing its performance and what it all means for investors.

So, let's get right to it. The third quarter of 2025 certainly had its share of twists and turns, much like a good mystery novel for many small-cap enthusiasts. While the broader market, as represented by the Russell 2000 Index, managed a modest advance of approximately 2.5% for the quarter, the Touchstone Small Company Fund ended Q3 2025 with a return of around 1.8% (net of fees). Yes, it did lag its primary benchmark ever so slightly, and the Russell 2000 Growth Index, another common reference, saw a return closer to 3.1%. But, as we all know, raw numbers only tell part of the story, don't they? There’s always more beneath the surface.

Digging a bit deeper, it wasn't all about trailing the index; far from it. The fund’s active management truly shone in a few key areas, demonstrating the value of careful stock selection. We saw some genuinely strong performance emerge from their holdings within the Industrials sector, particularly among niche manufacturing companies that exhibited robust demand and efficient operations. Healthcare, too, provided some pleasant surprises, with certain innovative medical device firms within the portfolio outperforming expectations, really making a difference.

However, no investment journey is without its bumps, and Q3 had a few for the Touchstone fund. A notable headwind was the fund's underweight position in the Consumer Discretionary sector. This area, especially specific retail sub-segments, saw unexpected strength during the quarter, and not having as much exposure here meant missing out on some of that upside. Furthermore, a couple of specific holdings within the Information Technology sector faced some unforeseen supply chain disruptions and reported earnings that, frankly, didn't quite hit the mark. These instances, though relatively isolated, did pull down the overall performance a touch.

Beyond the specifics of the portfolio, Q3 2025 itself was a fascinating and somewhat tricky period for small-cap stocks. We observed increasing uncertainty surrounding interest rates, which tends to weigh particularly heavily on growth-oriented small companies that are often more sensitive to borrowing costs. Geopolitical tensions also added a layer of market volatility, though it’s worth noting that small caps showed a decent amount of resilience towards the end of the quarter, perhaps hinting at some underlying strength.

The fund managers, in their commentary, have reiterated their unwavering conviction in active management and their commitment to rigorous, long-term fundamental analysis. They're not chasing fads; instead, they emphasize a focus on identifying high-quality companies with sustainable competitive advantages, aiming to filter out the short-term market noise. Their perspective is that current valuations in some corners of the small-cap market are actually quite attractive, potentially offering compelling entry points for discerning, patient investors. It’s clear they remain dedicated to their disciplined stock-picking process.

As we peer into the final quarter of the year and beyond, the team at Touchstone appears focused on continuing to identify those hidden gems within the small-cap universe. Their approach emphasizes thorough research and a willingness to be patient, allowing their carefully selected companies to grow and realize their potential. Ultimately, while Q3 2025 presented its unique set of challenges and triumphs, the fund's underlying strategy remains consistent: seeking out quality and long-term value in a dynamic and often overlooked segment of the market. It's a strategy that, for many, defines the very essence of active small-cap investing.