In the final quarter of 2025, the ClearBridge Select Strategy experienced underperformance, largely due to a market environment where value investing outpaced growth. Sectors such as healthcare and technology, particularly application software, presented significant challenges, as investors shifted focus away from momentum-driven themes towards companies with more robust, foundational strengths. Despite this, the U.S. equities market showed resilience, with major indexes nearing record highs, albeit with heightened volatility and a distinct preference for selective investments. The Russell 3000 Growth Index trailed its Value counterpart, and the Russell Midcap Growth Index, which includes many of the companies targeted by the ClearBridge Select Strategy, also saw a decline.
To navigate this dynamic landscape, the portfolio underwent a strategic overhaul, emphasizing innovation and long-term secular trends. Significant adjustments included initiating six new common stock positions and divesting from twelve others. Notable additions spanned various sectors, such as Wingstop in the restaurant industry, CompoSecure for secure payment solutions, BETA Technologies focusing on electric aircraft, and Wix.com for digital applications. The strategy also bolstered its presence in private markets, increasing exposure to cutting-edge companies like OpenAI, a leader in AI technologies, and Yellowstone Midco, involved in space and defense systems. These changes reflect an improved investment process, focusing on the opportunity cost of underperforming assets and broadening the growth lens beyond traditional application software, especially with the transformative impact of AI.
Looking ahead, the outlook for the equity market is optimistic, with several catalysts converging to support an extended upswing. The U.S. economy's consistent defiance of expectations, coupled with forthcoming fiscal stimulus, solid corporate earnings, and a resilient consumer base, suggests continued strength. Furthermore, an improving tariff environment and the Federal Reserve's easing stance are expected to foster a more stable interest rate landscape, benefiting a broader range of market participants. ClearBridge anticipates a broadening of market leadership beyond large-cap companies, creating a favorable environment for actively managed portfolios focused on small and mid-cap stocks. This shift, combined with potential mean reversion in SMID valuations and a policy environment conducive to M&A activity, is expected to provide significant tailwinds for the strategy.
Amidst evolving market conditions, continuous adaptation and a forward-thinking approach are crucial. By embracing innovation and secular trends, investors can uncover opportunities for substantial growth and long-term value creation, even in challenging economic climates. This proactive stance not only enhances portfolio resilience but also aligns with the dynamic nature of global markets, paving the way for sustained success.