In the initial quarter of 2026, market dynamics shifted significantly, favoring small-cap equities over their large-cap counterparts as investors rotated away from previously oversubscribed positions. This period saw the Russell 2000® benchmark for small-cap stocks surpass the broader market. The Virtus KAR Mid-Cap Core Fund (Class I) recorded a -3.88% return, lagging behind the Russell Midcap® Index, which posted a 1.29% gain. This underperformance was primarily attributed to specific stock choices and the fund's sector allocation, particularly an overweighting in financials and underweight positions in the energy and consumer discretionary sectors, at a time when value-oriented and energy stocks were showing stronger performance. Several companies within the fund's portfolio made notable contributions or faced challenges during this quarter. Monolithic Power Systems demonstrated robust growth across all its operational segments, with a significant boost from AI server applications as earlier design wins began to generate substantial revenue. Teledyne Technologies experienced expansion in its defense, space, and energy divisions, with strategic mergers and acquisitions coupled with stringent cost management leading to enhanced profit margins. Conversely, investment bank Houlihan Lokey saw its shares decline amidst a broader downturn in investment banking stocks, fueled by market apprehensions regarding the potential impact of AI on mergers and acquisitions activities.

The fund's investment management team proactively adjusted its holdings by divesting Bentley Systems. The capital generated from this sale was strategically reinvested into existing positions that were deemed to possess more compelling long-term fundamentals, offering better valuation and growth prospects. This reallocation reflects a commitment to optimizing the portfolio for future returns, focusing on companies with solid underlying businesses and attractive growth trajectories. These portfolio adjustments, including the addition of C.H. Robinson for its strong logistics capabilities and market presence, signify a forward-looking approach to capitalize on evolving market conditions and enhance the fund's long-term performance potential.

This strategic adaptation of the portfolio underscores a proactive and diligent investment philosophy. By continually evaluating and refining holdings based on fundamental strengths and market opportunities, the fund aims to achieve sustainable growth and deliver value to its investors. It emphasizes the importance of adaptability and rigorous analysis in navigating complex financial landscapes, ensuring that capital is deployed in assets most likely to thrive in the long run. Embracing change and focusing on inherent value are crucial for fostering enduring success in the investment world.