3Q 2026 5Perspectives Small-Mid Growth Commentary
During the third quarter of 2026, the Polen 5Perspectives Small-Mid Growth Composite Portfolio (the “Portfolio”) returned -12.5% net of fees compared to the -10.4% return of the Russell 2500 Growth Index.
Markets opened the quarter with a sharp, mechanically driven selloff in AI-related equities, then experienced a swift recovery into mid-August before a hawkish pivot from the Fed and a 25bps rate hike in September pushed the Russell 2500 Growth into a roughly -9% drawdown. We view the volatility largely as a "pause that refreshes," resetting extreme positioning and expectations rather than signaling a broad deterioration in the fundamentals of AI infrastructure and its adjacent themes.
What Caused the SMID Cap Sell-off in Q3 2026?
The quarter opened with a meaningful air pocket in AI-related equities, as a wave of hyperscaler earnings reports raised fresh questions about whether enormous AI-related capital expenditures would generate commensurate returns. These fundamental concerns were quickly compounded by crowded
positioning, elevated leverage, and forced selling, producing one of the sharpest, most concentrated selloffs the AI trade had experienced since the current cycle began in 2023, with semiconductor and AI infrastructure-related stocks bearing the brunt of the decline.
Hawkish commentary from new Fed Chair Kevin Warsh raised the odds of a 25bps rate hike, which ultimately came in mid-September. From mid-August through the end of the quarter, the Russell 2500 Growth entered a -9% drawdown.
Which Holdings Influenced the Portfolio's Performance?
Twist Bioscience was the largest contributor, while nLight was the largest detractor. Twist Bioscience is a provider of synthetic DNA and other next-generation genomic products used across drug discovery, diagnostics, and data storage applications. Shares outperformed during the quarter following another quarter of record revenue and accelerating growth, driven in part by increasing adoption of the company's platform for AI-enabled drug discovery.
nLight is a provider of high-power fiber lasers for aerospace, defense, and industrial applications. Despite reporting solid quarterly results, shares underperformed after the company issued third-quarter revenue guidance that came in below expectations, citing supply chain-related delays in sourcing optical
components from overseas suppliers. We continue to monitor the position given the company's leading position in high power defense related laser programs, which we believe remains a durable long-term growth driver
How Is the Portfolio's Sector Exposure Shifting?
The salient changes to positioning this quarter included our increased exposure to Health Care and decreased exposure to Industrials. The additions within Health Care fall under a broader theme of Health Care Innovation which encompasses Biotech and Medtech, but more specifically, themes like precision medicine/diagnostics, genomics, next generation therapeutics, and innovations that transform the delivery of care and improve on the standard of care. By contrast, the reduced exposure to Industrials came as we pared back exposures within the Electrification and AI infrastructure-related themes.
Frequently Asked Questions
Past performance does not guarantee future results. The commentary is not intended as a guarantee of profitable outcomes. Please see Important Disclosures in the full commentary.