Wasatch U.S. Select Fund Q1 2026 Commentary: Navigating AI's Impact on Small-Cap Markets

In the first quarter of 2026, the Wasatch U.S. Select Fund—Investor Class encountered a challenging period, concluding with an 8.99% decrease. This fluctuation reflects the dynamic and often unpredictable nature of small-cap equities, particularly amidst evolving investor sentiment. The market's enthusiasm for artificial intelligence (AI) continued to bolster companies integral to AI infrastructure development, even as other sectors faced headwinds. Wasatch Global Investors, an employee-owned firm established in 1975, remains committed to its investment philosophy, carefully navigating these shifts to identify and support resilient companies with sustainable earnings potential.

Wasatch U.S. Select Fund: Navigating Market Dynamics and AI Integration in Q1 2026

The first quarter of 2026 witnessed considerable turbulence in the small-cap stock market, characterized by rapid shifts in investor preferences. Amidst this volatility, the Wasatch U.S. Select Fund—Investor Class reported a notable decline of 8.99%. This period highlighted a clear division in market performance: companies contributing to artificial intelligence (AI) infrastructure, such as Nova Ltd. and Fabrinet, achieved robust returns, benefiting from the widespread excitement surrounding AI. These enterprises demonstrated exceptional resilience and growth, driven by their critical roles in the burgeoning AI sector.

Conversely, some holdings within the Fund faced significant challenges. Hamilton Lane, Inc., for instance, emerged as the primary drag on the Fund's performance during this quarter, underscoring the uneven impact of market shifts. In response to the evolving landscape shaped by AI, Wasatch proactively adjusted its portfolio. The Fund strategically divested from companies where the long-term implications of AI integration remained ambiguous, opting to reinforce its positions in businesses with clear competitive advantages, proprietary data, or strong network effects that are poised to thrive with AI advancements. While details on specific figures or exact dates of these transactions are not provided, the strategic realignment emphasizes a forward-looking approach to investment management.

Looking ahead, Wasatch maintains an optimistic outlook. The firm believes that many of its existing holdings, which experienced downturns due to recent market disruptions, are poised for a significant re-rating. This anticipated recovery is predicated on their inherent ability to consistently demonstrate robust earnings power, suggesting a strong underlying value that the market may eventually acknowledge more favorably.

The recent performance of the Wasatch U.S. Select Fund offers a compelling illustration of the complexities inherent in modern investment management, particularly with the rapid ascent of technologies like AI. For investors, this scenario underscores the critical importance of actively managed funds that possess the agility to adapt to fast-changing market conditions. Wasatch's strategic decision to refine its portfolio by shedding companies with uncertain AI prospects while retaining those with strong, enduring competitive advantages highlights a prudent approach. This adaptability is key to mitigating risks and capitalizing on emerging opportunities. Furthermore, the Fund's conviction in the eventual re-rating of undervalued holdings serves as a reminder of the long-term potential in carefully selected, resilient businesses. This approach encourages a patient perspective, emphasizing fundamental strength over short-term market noise, and suggests that embracing innovation strategically can lead to sustained growth, even in turbulent times.