FUND COMMENTARY
03/11/2025
Thrivent Asset Management contributors to this report: Steve Lowe, CFA, chief investment strategist; David Spangler, CFA, head of mixed assets and market strategies; and Jim Tinucci, CFA, senior portfolio manager.
Small-cap stocks can provide efficient exposure to powerful trends
Active management is essential for navigating the diverse small-cap landscape.
Small-cap stocks can offer more accessible exposure to emerging growth trends compared to private market investments.
In a well-diversified portfolio, small-cap stocks play an important but often underestimated role. While large-cap equities and private market unicorns dominate headlines, small-caps represent a source of diversification and potential outperformance over the long term.
As we’ve seen in recent years, small-caps are not always in favor. Their cyclical nature, sensitivity to interest rates and less-diversified end-markets mean that these stocks, in aggregate, can experience extended periods of underperformance. Yet, even in these periods, their strategic value in diversified portfolios should not be overlooked. Historically, when small-cap stocks rebound, they tend to deliver significant gains over short time spans. This pattern underscores the importance of maintaining consistent exposure to the asset class rather than attempting to time a market that can move suddenly.
For example, small-caps initially trailing in the early months of the pandemic, surged by the third quarter 2020 into the first quarter 2021, as vaccine rollouts, combined with strong monetary and fiscal support, fueled a risk-on rally. This led to a significant outperformance of small-caps relative to large-caps of more than 32% over the period 9/30/2020 – 2/26/2021.
It’s also important to consider that what is true for small-caps on average is far from universally applicable. The small-cap universe is vast and diverse, encompassing companies across industries, geographies and various stages of development. Although broad-based analyses may paint a mixed picture for small-cap stocks, skilled active managers have the ability to uncover companies with strong fundamentals and resilient business models poised in any market environment.
While the price-to-earnings (P/E) ratio of the small-cap Russell 2000® Index has lagged in recent years, historical data highlights extended periods of relative strength.
Beyond their important role as a diversifier, small-cap stocks can offer highly efficient access to emerging long-term growth drivers. Unlike their large-cap counterparts, which more often move in step with broader market sentiment, small-cap companies are often highly specialized, focusing on niche markets and developing cutting-edge solutions that cater to evolving consumer and business demands. These attributes make small-caps particularly effective at capturing early-stage growth opportunities tied to broad economic trends.
A common misconception about small-cap investing is the belief that the most promising small companies tied to such trends are increasingly likely to remain private, limiting opportunities for public market investors. While it is true that the number of initial public offerings (IPOs) have declined over recent decades, and some high-profile startups have opted to remain private, recent trends suggest this narrative is shifting. Many so-called unicorn startups that once attracted sky-high valuations are now facing financial strain, with more limited access to capital and diminishing growth prospects1. This environment reinforces the value of actively managed small-cap strategies.
Skilled active management in small-cap U.S. equities can provide targeted exposure to three powerful long-term trends shaping financial markets.
These themes are reflected across several of Thrivent’s investment strategies, including Thrivent Aggressive Allocation Fund, Thrivent Moderately Aggressive Allocation Fund, Thrivent Dynamic Allocation Fund, Thrivent Conservative Allocation Fund and Thrivent Small Cap Growth Fund.
The rapid advancement of AI is reshaping industries, creating new markets and transforming global economic structures. Estimates suggest AI could contribute as much as $15.7 trillion to the global economy by 2030, with gains driven by increased productivity, automation and innovation3. From health care and finance to manufacturing and logistics, AI is dramatically redefining how businesses across all sectors operate and interact with customers.
A significant set of small-cap companies play a vital but underappreciated role in the AI ecosystem. These firms, which possess specialized technologies that address the specific infrastructure, hardware and software needs of AI applications, often excel in niche areas where large-cap companies are unable to compete as effectively. In the AI sector, this includes specialized segments within advanced manufacturing technologies, semiconductor components, data services and software solutions.
The accelerated pace of AI development has also boosted demand for faster data transfer and advanced computing hardware. Networking bandwidth, for example, is a critical limiting factor for AI data centers, which rely on high-speed data transfers to support machine learning and deep learning applications.
Fabrinet, a leading provider of advanced optical and electronic manufacturing services, exemplifies how small-cap companies can capitalize on AI-driven growth. On behalf of its customers, the company fabricates specialized optical components that play a crucial role in enhancing the performance of AI clusters—networks of high-powered servers designed to process vast amounts of data for machine learning and large language model training. These clusters are particularly reliant on high-speed, efficient data transfer, making Fabrinet’s technology essential in datacenters. Growing demand for higher optical speeds is expected to accelerate Fabrinet’s revenue, with our projections indicating growth more than twice the consensus estimates.
A significant driver of this growth is the company’s partnership with NVIDIA Corporation, where Fabrinet manufactures critical networking components for AI infrastructure. Because AI datacenters require exceptional bandwidth capacity, Fabrinet’s role in supporting next-generation networking solutions has become increasingly vital.
Fabrinet is also seeing growth in its telecommunications segment, which we expect to expand by more than 10% in the long term. Within this business, the datacenter interconnect (DCI) market accounts for more than 20% of revenue and is driven by the growing need for faster data transfers between AI datacenters. Major vendors such as Cisco, Ciena and Infinera all rely on Fabrinet for their optical manufacturing needs, illustrating the company's dominant competitive position in this space.
The company’s automotive segment presents additional growth opportunities. Here Fabrinet’s services support Tesla’s rapidly expanding supercharging network, the growth of which has been further bolstered by other major automakers adopting Tesla’s charging port technology. Moreover, Fabrinet is a key supplier of LiDAR manufacturing, which uses light in the form of a pulsed laser to measure ranges, serving all major LiDAR providers, positioning the company at the forefront of innovations in autonomous driving. Supported by these tailwinds, Fabrinet’s automotive revenues have expanded by more than 60% over the past two years.
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Economic data released in early 2025 shows the economy is slowing at a greater-than-expected rate.
The most significant global demographic trend is the rapid aging of the population. This aging trend presents both societal challenges and significant opportunities for companies positioned to meet the growing demand for health care, end-of-life care and senior living solutions. The growing need for all things health care encompasses a range of sectors, from long-term care and specialized medical treatments to innovative therapeutics and advanced medical devices.
According to projections by the Centers for Medicare & Medicaid Services, U.S. national health expenditures are expected to reach $7.7 trillion by 2032, up from $4.8 trillion in 20234. This represents an increase of approximately 60% over the nine-year period. We believe many of today’s small-cap companies will play a pivotal role in meeting this demand and potentially evolve into the large-caps of tomorrow.
In the U.S., the convergence of an aging, affluent population with the rapid expansion of innovation-driven industries is generating strong momentum for health care-related demand. This surge is, in turn, driving growth in property sectors that directly support health care advancements and cater to the unique needs of older adults—such as life sciences facilities, medical centers and senior housing developments.
Driven by rising medical costs and an aging population, total health care spending is approaching $5 trillion annually, accounting for 18% of U.S. gross domestic product (GDP).
Chemed Corporation, through its VITAS Healthcare segment, is a leading provider of hospice care services in the U.S. Our internal projections indicate the 85+ population is set to nearly double by 2031, driving higher hospice utilization rates and creating a substantial growth runway for Chemed’s services.
Chemed’s robust position in the hospice market is bolstered by its ability to navigate regulatory environments effectively and maintain stable reimbursement structures. For instance, the company's participation in value-based insurance design programs has demonstrated limited financial risk, with recent data suggesting minimal savings from the initiative. This stability, combined with favorable demographic trends, supports Chemed’s long-term growth trajectory.
In addition to hospice care, Chemed’s Roto-Rooter segment benefits from macroeconomic factors tied to aging demographics. As older homeowners invest more in maintaining their properties, services such as plumbing and water restoration are expected to see sustained demand. This diversification across health care and essential home services enhances Chemed’s revenue stability and growth potential.
Chemed’s financial outlook reflects its strong market position. The company’s return on invested capital (ROIC) reached 22% in 2023, and we expect continued growth driven by increased hospice utilization and stable reimbursement frameworks.
The U.S. housing market is facing a persistent, structural shortage due to a combination of demographic shifts, limited housing supply and rising home equity values. The U.S. currently faces a housing shortfall of roughly 3.7 million homes, a gap that will require significant investment and development over the coming decade to close5.
This housing crisis has intensified due to historically low housing turnover. Many homeowners, benefiting from historically low mortgage rates secured during previous economic cycles, are choosing to stay in place rather than upgrade, reducing the availability of homes on the market. At the same time, home equity values have reached record highs, with total home equity in the U.S. rising to more than $34 trillion—an increase of $15 trillion since 20196.
These factors have fueled a surge in demand for home renovations and remodeling, particularly as homeowners choose to improve their existing residences rather than enter a competitive housing market with higher borrowing costs. The R&R sector is now valued at over $500 billion and should continue to experience steady growth in the coming years7.
The ability for small-cap companies to specialize in niche segments of the housing market, such as home improvement products and services, allows them to capitalize on the growing demand for residential renovations. These firms often serve as critical suppliers and service providers to larger builders and retailers.
Fueled by rising home prices, low mortgage rates and limited housing supply, U.S. homeowners' equity in real estate has surged since the onset of the pandemic.
MasterBrand, Inc. is the largest kitchen and bath cabinet maker with a market share of more than 25%, roughly 50% larger than the number two player. The U.S. cabinet industry is a "two-tiered" market, with the top four producers controlling more than 60% of the market. In total, there are thousands of cabinet companies, mostly small, under $5 million local enterprises. MasterBrand provides a broad spectrum of styles and price points, with higher quality cabinets sold through its network of 7,000 dealers, and mass price-point products sold primary through large retailers Home Depot and Lowes.
The company has strategically positioned itself to benefit from the R&R market’s sustained growth, focusing on kitchen and bathroom upgrades—projects that typically offer the highest return on investment for homeowners. With a backlog of home improvement projects accumulated during the pandemic and continued demand driven by rising home equity, MasterBrand is poised for significant revenue expansion. In addition, MasterBrand’s scale, product breadth and quality, and ability to deliver efficiently for both small and large customers, are significant competitive advantages.
MasterBrand’s financial outlook reflects its strong market position and growth potential. The company’s strategic initiatives—such as consolidating product lines, optimizing manufacturing systems and enhancing operational efficiencies—are expected to drive margin improvements and increase free cash flow. The company is prioritizing deleveraging as part of its financial strategy. By maintaining discipline and optimizing fixed assets and systems, MasterBrand is positioning itself to strengthen its market leadership.
Media contact: Callie Briese, 612-844-7340; callie.briese@thrivent.com
Past performance is not necessarily indicative of future results.
All information and representations herein are as of 03/11/2025, unless otherwise noted.
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Thrivent Asset Management, LLC associates. Actual investment decisions made by Thrivent Asset Management, LLC will not necessarily reflect the views expressed. This information should not be considered investment advice or a recommendation of any particular security, strategy or product. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.
Small Cap Stock Risks: Smaller, less seasoned companies often have greater price volatility, lower trading volume, and less liquidity than larger, more established companies. These companies tend to have small revenues, narrower product lines, less management depth and experience, small shares of their product or service markets, fewer financial resources, and less competitive strength than larger companies. Such companies seldom pay significant dividends that could soften the impact of a falling market on returns.
This article refers to specific securities which Thrivent Mutual Funds may own. A complete listing of the holdings for each of the Thrivent Mutual Funds is available on thriventfunds.com.
Thrivent Aggressive Allocation Fund Top 10 Holdings as of 12/31/2024: Thrivent Large Cap Growth Fund, Class S: 8.83%; Thrivent International Allocation Fund, Class S: 5.88%; Thrivent Mid Cap Stock Fund, Class S: 4.93%; Thrivent Large Cap Value Fund, Class S: 4.71%; Thrivent Core International Equity Fund: 3.37%; Thrivent Core Mid Cap Value Fund: 2.46%; Thrivent Global Stock Fund, Class S: 2.35%; Thrivent Small Cap Stock Fund, Class S: 2.25%; Thrivent Core Emerging Markets Equity Fund: 1.88% and Microsoft Corporation: 1/28%.
Thrivent Moderately Aggressive Allocation Fund Top 10 Holdings as of 12/31/2024: Thrivent Large Cap Growth Fund, Class S: 11.37%; Thrivent Large Cap Value Fund, Class S: 8.91; Thrivent International Allocation Fund, Class S: 6.11%; Thrivent Mid Cap Stock Fund, Class S: 5.76; Thrivent Global Stock Fund, Class S: 4.85%; Thrivent Core International Equity Fund: 2.80%; Thrivent Small Cap Stock Fund, Class S: 1.73%; Thrivent Income Fund, Class S: 1.54%; Thrivent Core Emerging Markets Equity Fund: 1.52% and Thrivent Core Mid Cap Value Fund: 1.36%.
Thrivent Dynamic Allocation Fund Top 10 Holdings as of 12/31/2024: Thrivent Core International Equity Fund: 6.26%; Thrivent Core Emerging Markets Debt Fund: 4.91%; Microsoft Corporation: 1.25%; NVIDIA Corporation: 1.23%; Apple, Inc.: 1.23%; Federal National Mortgage Association Conventional 30-Yr. Pass Through with a maturity of 1/1/2055: 0.89%; U.S. Treasury Bonds with a maturity of 8/15/2042: 0.89%; Amazon.com, Inc.: 0.85%; U.S. Treasury Notes with a maturity of 7/31/2028: 0.84%; and Meta Platforms, Inc.: 0.77%.
Thrivent Conservative Allocation Fund Top 10 Holdings as of 12/31/2024: Thrivent Core Emerging Markets Debt Fund: 7.90%; U.S. Treasury Notes with a maturity of 7/31/2026: 3.00%; U.S. Treasury Notes with a maturity of 12/31/2025: 1.57%; Federal National Mortgage Association Conventional 30-Yr. Pass Through with a maturity of 12/1/2052:1.56%; U.S. Treasury Notes with a maturity of 7/31/2028: 1.16%; Thrivent Core International Equity Fund: 1.07%; Federal National Mortgage Association Conventional 30-Yr. Pass Through with a maturity of 3/1/2052: 0.92%; Federal National Mortgage Association Conventional 30-Yr. Pass Through with a maturity of 3/1/2051: 0.86%; Federal National Mortgage Association Conventional 30-Yr. Pass Through with a maturity of 1/1/2052: 0.85% and Federal National Mortgage Association Conventional 30-Yr. Pass Through with a maturity of 7/1/2053: 0.85%.
Thrivent Small Cap Growth Fund Top 10 Holdings as of 12/31/2024: Triumph Financial, Inc.: 2.21%; Cargurus, Inc.: 2.19%; Globus Medical, Inc.: 2.07%; Workiva, Inc.: 1.84%; J & J Snack Foods Corporation: 1.84%; ExlService Holdings, Inc.: 1.77%; Guidewire Software, Inc.: 1.74%; Penumbra, Inc.: 1.73%; Agilysys, Inc.: 1.72% and Boot Barn Holdings, Inc.: 1.57%.
Any indexes shown are unmanaged and do not reflect the typical costs of investing.
The S&P 500 Index is an unmanaged index considered representative of the U.S. stock market.
The Russell Top 50 Mega Cap Index measures the performance of the largest companies in the Russell 3000 Index. It includes approximately 50 of the largest securities.
The Russell 1000 Index measures the performance of U.S. large capitalization equities.
The Russell Mid Cap Index measures the performance of U.S. medium-capitalization equities.
The Russell 2000 Index measures the performance of U.S. small capitalization equities. Investors cannot invest directly in an index.
Price-to-earnings (P/E) measures a company's share price relative to its earnings per share (EPS). Often called the price or earnings multiple, the P/E ratio helps assess the relative value of a company's stock.
Compound annual growth rate (CAGR) is the rate of return that an investment would need to have every year in order to grow from its beginning balance to its ending balance, over a given time interval. The CAGR assumes that any profits were reinvested at the end of each period of the investment’s life span.
Return on invested capital (ROIC) assesses a company’s efficiency in allocating capital to profitable investments. It is calculated by dividing net operating profit after tax by invested capital.
1“Desperate Unicorn Startups Can’t IPO and Are Starved for Cash” Bloomberg. February 14, 2025. news.bloomberglaw.com/private-equity/desperate-unicorn-startups-cant-ipo-and-are-starved-for-cash. February 27, 2025.
2“Demographic Turning Points for the United States: Population Projections for 20202 to 2060” U.S. Census Bureau. February 2020 www.census.gov/content/dam/Census/library/publications/2020/demo/p25-1144.pdf?utm. February 24, 2025.
3“Sizing the prize” PWC. 2017 www.pwc.com/gx/en/issues/artificial-intelligence/publications/artificial-intelligence-study.html?utm. February 25, 2025.
4“CMS Releases 2023-2032 National Health Expenditure Projections” Centers for Medicare & Medicaid Services. June 12, 2024 www.cms.gov/newsroom/press-releases/cms-releases-2023-2032-national-health-expenditure-projections?utm_. February 27, 2025.
5“Economic, Housing and Mortgage Market Outlook-November 2024 | Spotlight: Housing Supply” Freddie Mac. November 26, 2024, www.freddiemac.com/research/forecast/20241126-us-economy-remains-resilient-with-strong-q3-growth?utm_. February 28, 2025.
6“Households; Owners’ Equity in Real Estate, Level” Federal Reserve Bank of St. Louis. January 6, 2025. fred.stlouisfed.org/series/OEHRENWBSHNO?utm_. March 3, 2025.
7“U.S. Residential Remodeling Market Size Report” Grand View Research. January 2024. www.grandviewresearch.com/industry-analysis/us-residential-remodeling-market-report. February 27, 2025.
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