Navigating the Untamed Waters of Small-Cap Equities: Embark Fund's Q2 2025 Deep Dive

As we close the books on Q2 2025, the narrative in the equity markets continues to be dominated by a tale of two halves: the soaring titans of large-cap technology versus the often-overlooked, yet resilient, world of small-cap companies. The Embark Small Cap Equity Fund's commentary for this quarter offers a compelling look at how these smaller, agile businesses are navigating a complex economic landscape and where opportunities may lie for discerning investors.

For much of Q2, small-cap equities, as measured by the Russell 2000 Index, found themselves in a familiar position – playing catch-up.

Despite the broader market enthusiasm, smaller companies faced persistent headwinds, primarily stemming from stubbornly high interest rates and lingering inflationary pressures. These factors disproportionately affect small businesses, increasing their borrowing costs and squeezing profit margins, often more acutely than their larger, more established counterparts.

The Embark Fund, however, demonstrated its strategic resilience, managing to slightly outperform its benchmark during this challenging period, a testament to its focused investment philosophy.

Our team at Embark remains acutely aware of the economic forces at play. The 'higher-for-longer' interest rate narrative from central banks continues to cast a long shadow, making capital more expensive and discounting future earnings more aggressively for growth-oriented smaller firms.

Furthermore, while inflation has shown signs of moderation, its impact on consumer purchasing power and corporate input costs is still a critical consideration for many small-cap enterprises. Yet, within this challenging environment, pockets of strength and compelling value continue to emerge.

Our investment strategy remains unwavering: we meticulously seek out high-quality businesses that possess robust balance sheets, strong free cash flow generation, and defensible competitive advantages.

We believe in partnering with companies that are leaders in their niches, led by experienced management teams capable of navigating economic uncertainties. This quarter, our focus has been on selectively adding to positions in companies exhibiting these characteristics, particularly those with attractive valuations that may be overlooked by the broader market.

We've seen relative strength in sectors such as industrials and certain financials, where fundamental strength and pricing power are more evident, while carefully treading in areas more sensitive to rate fluctuations.

Looking ahead, the long-term outlook for small-cap equities remains compelling.

Historically, small caps have often led market recoveries, and their current valuation discount relative to large caps suggests a significant opportunity once macro conditions begin to stabilize. While the timing of an interest rate pivot or a sustained acceleration in economic growth remains uncertain, we believe the seeds for a potential small-cap resurgence are being sown.

The Embark Small Cap Equity Fund is positioned to capitalize on this eventual shift, continuing to identify and invest in those innovative, resilient companies poised for significant long-term growth. We maintain a cautiously optimistic stance, focusing on fundamental strength and a disciplined investment approach to unlock value for our shareholders.