The market began the second quarter on its heels, with stocks coming off a historically poor start to the year while navigating a wide range of geo-political issues including a new U.S. tariff policy, escalating tensions in the Middle East and the ongoing conflict in Ukraine. Despite the already poor year-to-date returns, U.S. equity markets of all sizes absorbed further losses in the early days of the new quarter, highlighted by the S&P 500 trading down an additional -11% as the official “Liberation Day” details were announced on April 8th. At that point, with sentiment historically negative, the VIX Volatility Index (VIX) at its highest levels since 2022, and small capitalization stocks as measured by the Russell 2000 down more than -21% year-to-date, sellers capitulated and stocks rebounded sharply. (Source: Furey Research Partners, FactSet (FDS))
As tariff fears subsided over the rest of the quarter and market volatility dropped precipitously, the S&P 500 rallied more than +25% from its April lows and reached a new all-time closing high, ending the quarter up +10.5%. While the Russell 2000 only rose +8% in the second quarter, the Small Cap Growth segments of the market saw much better performance. In fact, the Russell 2000 Growth, Russell Midcap Growth, and Russell Microcap Growth indices each posted stronger returns than the S&P 500 in the second quarter.
In addition to the extreme price swings, the post-Liberation Day rally was led by a relatively small number of stocks. Within Large Caps, the “Magnificent 7” Mega Caps (Amazon (AMZN), Apple (AAPL), Google (GOOG), (GOOGL), (Alphabet), Meta (META), Microsoft (MSFT), Nvidia (NVDA) and Tesla (TSLA) make up more than a quarter of the U.S. market) rose nearly +7% in the second quarter and accounted for 65% of the S&P 500’s total return over the period. This type of narrow leadership extended into Small Caps as well. Within our investment universe, 30% of the Russell 2000 Growth Index’s gains came from just ten stocks, while the Russell Mid Cap Growth Index received 59% of its returns from its ten best performers. (Continued on following page.)
Performance* (Total Net Returns as of 6/30/25)
2Q25
YTD
1 Year
3 Years
5 Years
10 Years
SinceInception12/31/1998
Conestoga Small CapComposite (NET)
4.76%
3.94%
7.91%
6.10%
10.06%
10.78%
Russell 2000 GrowthIndex
11.97%
9.73%
12.38%
7.42%
7.14%
6.91%
Since1/31/2017
Conestoga SMid CapComposite (NET)
5.00%
11.03%
11.90%
8.13%
12.68%
Russell 2500 GrowthIndex
11.31%
8.81%
12.05%
7.50%
9.74%
Since12/31/2019
Conestoga Micro CapComposite (NET)
15.65%
6.12%
25.50%
6.97%
8.06%
8.92%
Russell Microcap GrowthIndex
20.92%
20.46%
11.54%
5.21%
5.09%
Since3/31/2010
Conestoga Mid CapComposite (NET)
3.46%
4.45%
7.94%
10.29%
6.72%
10.50%
11.23%
Russell Midcap GrowthIndex
18.20%
9.79%
26.49%
21.46%
12.65%
12.13%
13.22%
*Periods longer than One Year are Annualized. Please see additional important disclosures in the fully compliant GIPS presentations at the end of this commentary. Russell 2000 Growth Index measures the performance of those Russell 2000 companies with higher price-tobook ratios and higher forecasted growth values. Russell 2500 Growth Index measures the performance of those Russell 2500 companies with higher price-to-book ratios and higher forecasted growth values. Russell Microcap Growth Index measures the performance of those Russell Microcap companies with higher price-to-book ratios and higher forecasted growth values. Russell Midcap Growth Index measures the performance of those Russell Midcap companies with higher price-to-book ratios and higher forecasted growth values.
Factor returns also played a significant role in the second quarter results, with low quality stocks leading the gains from April 8th through the end of June. More specifically, unprofitable stocks in the Russell 2000 rose +12.9% in the quarter, nearly doubling the +6.9% return of their profitable peers. Similarly, the highest beta, lowest share price, and worst ROIC companies all outperformed the Index in the quarter. Historically, periods characterized by narrow leadership and “low quality” outperformance have represented a headwind for our high quality growth portfolios and did again this quarter.
Looking to the second half of the year, with the final details of the tariff policies still unknown, the conflicts overseas still evolving, and the Fed hesitant about the outlook for growth and inflation, uncertainty could remain a feature of the market in the near-term. However, with Small Caps continuing to trade at historically low valuation multiples when compared to Large Caps, and revenue and earnings growth just now re-emerging and accelerating higher following multiple years of contraction, we feel very comfortable with the “high quality” conservative growth characteristics of our portfolio.
Firm Update
We are pleased to announce that Chris Gaito has joined the firm in the newly created role of Client Portfolio Manager. In this role, he will work closely with both the Investment and Distribution teams to provide communication of Conestoga’s investment strategies with clients, prospects, and consultants on behalf of the Portfolio Managers, while also producing value-added content and thought leadership to external stakeholders.
Prior to joining Conestoga, Chris was a Partner and Co-Founder at Furey Research Partners, a preeminent independent research firm focused on the Small Cap equity market. In his sixteen years there, Chris was primarily responsible for forming and managing client relationships with institutional investors, content creation and development, as well as running the firm’s marketing and conference operations. Prior to that, Chris was a Vice President in Morgan Stanley’s (MS) Institutional Equity division, spending nine years in a variety of roles across research, sales, and trading, including institutional sales and client relationship management, in both their U.S. and international equity units. His time there also included multiple years on the U.S. Institutional Equity Product Marketing desk. Chris received his Bachelor of Arts in Economics from Johns Hopkins University.
As of June 30, 2025, Conestoga’s total assets were $8.1 billion. Assets within our four primary institutional investment strategies were:
Comparing Conestoga’s Investment Strategies (as of 6/30/25)
Portfolio Guidelines
Micro Cap Growth
Small Cap Growth
SMid Cap Growth
Mid Cap Growth
Strategy Inception
11/30/2018
12/31/1998
12/31/2013
3/31/2010
Investment Vehiclest
SA, MF
SA, MF, CIF
SA, MF, CIF
SA, MF
Primary Benchmark
Russell MicrocapGrowth
Russell 2000 Growth
Russell 2500 Growth
Russell MidcapGrowth
Total Strategy Assets
$50.1 Mil
$6,014.6 Mil
$1,931.7 Mil
$21.9 Mil
Availability
Open – $500 MilPlus Capacity
Limited
Open – $4.5 BilPlus Capacity
Open – $10 BilPlus Capacity
Market Cap. (Wtd. Avg.)
$1.5 Bil
$5.5 Bil
$10.6 Bil
$31.1 Bil
Number of Holdings
25-40
45-50
40-60
30-45
†SA = Separate Account, MF = Mutual Fund, CIF = Collective Investment Fund. Source: FactSet.
This table was provided as an illustrative example of Conestoga’s portfolios. Guidelines and compositions may change over time and are based on information as of 6/30/25.
Conestoga Capital Advisors Q2 2025 Commentary (Mutual Fund:CCASX)
bombermoon/iStock via Getty Images
Market Review
The market began the second quarter on its heels, with stocks coming off a historically poor start to the year while navigating a wide range of geo-political issues including a new U.S. tariff policy, escalating tensions in the Middle East and the ongoing conflict in Ukraine. Despite the already poor year-to-date returns, U.S. equity markets of all sizes absorbed further losses in the early days of the new quarter, highlighted by the S&P 500 trading down an additional -11% as the official “Liberation Day” details were announced on April 8th. At that point, with sentiment historically negative, the VIX Volatility Index (VIX) at its highest levels since 2022, and small capitalization stocks as measured by the Russell 2000 down more than -21% year-to-date, sellers capitulated and stocks rebounded sharply. (Source: Furey Research Partners, FactSet (FDS))
As tariff fears subsided over the rest of the quarter and market volatility dropped precipitously, the S&P 500 rallied more than +25% from its April lows and reached a new all-time closing high, ending the quarter up +10.5%. While the Russell 2000 only rose +8% in the second quarter, the Small Cap Growth segments of the market saw much better performance. In fact, the Russell 2000 Growth, Russell Midcap Growth, and Russell Microcap Growth indices each posted stronger returns than the S&P 500 in the second quarter.
In addition to the extreme price swings, the post-Liberation Day rally was led by a relatively small number of stocks. Within Large Caps, the “Magnificent 7” Mega Caps (Amazon (AMZN), Apple (AAPL), Google (GOOG), (GOOGL), (Alphabet), Meta (META), Microsoft (MSFT), Nvidia (NVDA) and Tesla (TSLA) make up more than a quarter of the U.S. market) rose nearly +7% in the second quarter and accounted for 65% of the S&P 500’s total return over the period. This type of narrow leadership extended into Small Caps as well. Within our investment universe, 30% of the Russell 2000 Growth Index’s gains came from just ten stocks, while the Russell Mid Cap Growth Index received 59% of its returns from its ten best performers. (Continued on following page.)
Performance* (Total Net Returns as of 6/30/25)
Factor returns also played a significant role in the second quarter results, with low quality stocks leading the gains from April 8th through the end of June. More specifically, unprofitable stocks in the Russell 2000 rose +12.9% in the quarter, nearly doubling the +6.9% return of their profitable peers. Similarly, the highest beta, lowest share price, and worst ROIC companies all outperformed the Index in the quarter. Historically, periods characterized by narrow leadership and “low quality” outperformance have represented a headwind for our high quality growth portfolios and did again this quarter.
Looking to the second half of the year, with the final details of the tariff policies still unknown, the conflicts overseas still evolving, and the Fed hesitant about the outlook for growth and inflation, uncertainty could remain a feature of the market in the near-term. However, with Small Caps continuing to trade at historically low valuation multiples when compared to Large Caps, and revenue and earnings growth just now re-emerging and accelerating higher following multiple years of contraction, we feel very comfortable with the “high quality” conservative growth characteristics of our portfolio.
Firm Update
We are pleased to announce that Chris Gaito has joined the firm in the newly created role of Client Portfolio Manager. In this role, he will work closely with both the Investment and Distribution teams to provide communication of Conestoga’s investment strategies with clients, prospects, and consultants on behalf of the Portfolio Managers, while also producing value-added content and thought leadership to external stakeholders.
Prior to joining Conestoga, Chris was a Partner and Co-Founder at Furey Research Partners, a preeminent independent research firm focused on the Small Cap equity market. In his sixteen years there, Chris was primarily responsible for forming and managing client relationships with institutional investors, content creation and development, as well as running the firm’s marketing and conference operations. Prior to that, Chris was a Vice President in Morgan Stanley’s (MS) Institutional Equity division, spending nine years in a variety of roles across research, sales, and trading, including institutional sales and client relationship management, in both their U.S. and international equity units. His time there also included multiple years on the U.S. Institutional Equity Product Marketing desk. Chris received his Bachelor of Arts in Economics from Johns Hopkins University.
As of June 30, 2025, Conestoga’s total assets were $8.1 billion. Assets within our four primary institutional investment strategies were:
Comparing Conestoga’s Investment Strategies (as of 6/30/25)
†SA = Separate Account, MF = Mutual Fund, CIF = Collective Investment Fund. Source: FactSet.
This table was provided as an illustrative example of Conestoga’s portfolios. Guidelines and compositions may change over time and are based on information as of 6/30/25.
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