In the initial quarter of 2026, the Virtus KAR Mid-Cap Growth Fund recorded a notable decline in its performance, with a return of -13.54% (Class I). This figure stands in stark contrast to the -6.35% return observed for its benchmark, the Russell Midcap® Growth Index, indicating a substantial underperformance. This disparity was largely influenced by the fund's specific stock choices and its reduced allocation to the industrials and energy sectors. However, strategic stock selection within the information technology sector, coupled with a lower weighting in utilities, offered some positive impact. This period also witnessed a broader market trend where smaller capitalization stocks generally outperformed their larger counterparts, suggesting a rotation in investor preferences.
During the first three months of 2026, a notable shift in market dynamics occurred, characterized by small-cap equities outperforming large-cap stocks. This trend signals a reallocation of capital by investors, moving away from previously popular trading positions. The Russell 2000® index, which tracks small-cap companies, surpassed the broader market measures, including the Russell Midcap® Growth Index. This indicates a renewed interest in the growth potential offered by smaller enterprises.
The Virtus KAR Mid-Cap Growth Fund's performance during this quarter was particularly affected by its investment decisions within certain sectors. The fund's picks in the industrials and energy sectors, along with its deliberate underweighting of these areas, proved detrimental to its overall returns. Conversely, the fund's astute choices within the information technology sector provided a positive counterbalance, mitigating some of the losses incurred elsewhere. Furthermore, a reduced exposure to the utilities sector also contributed favorably to the fund's performance.
The first quarter of 2026 was marked by a distinct change in market leadership, favoring small-cap stocks over large caps. This reorientation of investor capital led to the Russell 2000® index surpassing the overall market performance. The Virtus KAR Mid-Cap Growth Fund's returns were negatively impacted by specific stock selection and an underweight position in the industrials sector, alongside a similar stance in the energy sector. Conversely, the fund benefited from its stock choices in the information technology sector and its limited exposure to the utilities sector.