Small Cap Select – Q2 2026 Commentary

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The Market:

U.S. small-cap equities rallied strongly in the second quarter. Oil prices declined as tensions with Iran eased, unwinding much of the first quarter’s spike and removing a key source of uncertainty for the growth outlook. Inflation continued to run above target, keeping pressure on the Federal Reserve, though falling energy prices offered some relief on the headline rate. Against that backdrop, technology stocks led the market sharply higher, and small caps participated fully in the rally.

Performance:

For the second quarter of 2026, the Select Composite experienced a return of 32.87% (gross of fees) and 32.69% (net of fees) compared to the Russell 2000®, which returned 21.49%.  Year-to-date, the Select Composite experienced a return of 30.34% (gross of fees) and 29.98% (net of fees) compared to the Russell 2000®, which returned 22.57%.  Certain account performance may vary from this composite performance due to client-initiated account restrictions on certain types of holdings or due to client cash flows.

Data as of 6/30/2026

Information Technology was our best-performing sector during the quarter, driven by both our overweight position and strong stock selection. Our three largest individual contributors all came from the sector. A provider of memory and advanced computing solutions, led the way as its AI infrastructure offerings gained traction with enterprise customers building out their own computing capacity. A designer of analog semiconductors, benefited from continued content gains in automotive alongside accelerating data center demand for its power management components.  A provider of process control systems for semiconductor manufacturing, is gaining market share as chipmakers expand advanced packaging capacity for AI chips. Each of these stocks appreciated dramatically during the quarter. In response, we trimmed all three positions as their prices moved closer to our view of their value, but we continue to own each one.

Beyond Information Technology, our overweight in Industrials was the other meaningful driver of results. Oil’s retreat and improving leading macroeconomic data supported the group broadly, while our aerospace and defense holdings continued to execute well. Notably, this same overweight was among our largest headwinds in the month of March, when the oil shock hit industrial stocks hardest. We maintained our positions through that period, as the catalysts we invested behind were unaffected by the swings in oil.

Health Care was our weakest sector during the quarter. Our overweight in health care equipment underperformed, while biotechnology, where we are underweight, rallied strongly. A developer of musculoskeletal implants and enabling technologies for spine surgery, was among our largest detractors. The stock declined following its earnings report on fears that growth will decelerate in the coming years. We had aggressively trimmed the position before the report, which reduced the impact of the decline. We believe management has proven highly capable and can continue to grow the business while putting capital to work at attractive returns. We continue to own the stock. An oil and gas exploration and production company, also weighed on results as shares fell alongside oil prices following the de-escalation with Iran. Our thesis centers on the company’s meaningfully improved capital efficiency, as it generates more production from each dollar of capital spending than the market appreciates. We added to the position during the quarter and remain invested.

This quarter’s results are a product of how we build the portfolio. Our process starts with individual companies and their underappreciated catalysts that can improve returns and cash flow. Our sector weightings and position sizes follow from where we find those ideas. This approach creates a concentrated portfolio where performance can differ significantly from the benchmark in any given quarter. Over time, we continue to expect the value our investments create to drive strong results.

Portfolio:

 As of June 30, 2026, we are most overweight the Industrials, Information Technology, and Utilities sectors, while we are most underweight the Health Care, Consumer Discretionary, and Financials sectors.  As always, our sector allocations are driven by where we find the most attractive investments.

The Future:

The U.S. economy remains robust, supported by continued strength in employment. The oil shock triggered by the Iran conflict proved short-lived. Core inflation, however, has continued to trend higher, and under a new Federal Reserve chair, the odds of a rate hike have grown over recent months. That said, the underlying economy looks capable of absorbing tighter policy.

Overall, we view the economic backdrop as solid, with strong pockets of investment activity and end-market demand appearing to broaden. This backdrop supports maintaining our balanced approach to economic sensitivity while leaning into areas of accelerating fundamental improvement. In this setting, our focus remains on identifying and investing in companies with distinctive, catalyst-driven strategies to expand their returns and create value.

Thank you for your continued confidence in us.  Please do not hesitate to reach out if you are interested in additional information or have questions about the positioning of the portfolio.

Sincerely,

Alex Mosman, CFA®

Portfolio Manager

 Sam Peterman, CFA®

Assistant Portfolio Manager
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Kennedy Capital Management LLC (“KCM”) is a Delaware limited liability company headquartered in Missouri.  KCM is registered as an investment adviser with the Securities and Exchange Commission under the Investment Advisers Act of 1940. Registration with the SEC does not imply any level of skill or training. Clients of the Firm include U.S. corporations, pension and profit sharing funds, colleges and universities, trusts, not-for-profit organizations, foundations, and individuals. KCM claims compliance with the Global Investment Performance Standards (GIPS®). GIPS® is a registered trademark of CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein. GIPS® are a set of standardized, industry-wide ethical principles that provide investment firms with guidance on calculating and reporting their investment results to prospective clients to ensure fair representation and full disclosure of an investment firm’s performance history.

Although the statements of fact and data in this report have been obtained from, and are based upon, sources that the Firm believes to be reliable, we do not guarantee their accuracy, and any such information may be incomplete or condensed. All opinions included in this report constitute the Firm’s judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. A complete list of all securities recommended by KCM in the preceding year, a fully compliant GIPS composite report, and the list of composite descriptions are available upon request from KCM at 10829 Olive Blvd., Suite 100. St. Louis, MO, 63141.

Investing in the stock market involves gains and losses and may not be suitable for all investors. Investing in equity securities is speculative and involves substantial risk.  Small cap securities may involve more risk than larger-cap securities.  Investments concentrated in sector or specific industry may involve greater risk and volatility than more diversified investments.  

The Small Cap Select Composite invests in small cap value and small cap growth companies that demonstrate valuation below, return on assets above and return on equity above those of the Russell 2000® Index, while observing tax sensitivity strategies. For comparison purposes the composite is measured against the Russell 2000® Index. The U.S. Dollar is the currency used to express performance.

Composite specific data provided within this presentation has been calculated from accounts that are discretionary as defined in this paragraph. The assets shown are derived only from discretionary accounts. Non-discretionary accounts, as defined by KCM, are accounts that are not included in the composite due to one or any combination of the following criteria: there were significant cash inflows or outflows within the account; the account’s asset level did not meet the minimum requirement to remain in the composite; the account assets are managed by others using our non-discretionary model. The temporary removal of such an account occurs at the beginning of the month and the account re-enters the composite the month after the criteria has been met.

Performance returns are presented gross and net of investment advisory fees and include the reinvestment of all income. Gross of fee returns reflect the deduction of transaction costs and custodian fees but do not reflect the deduction of investment advisory fees. Net of fee performance is calculated using gross returns less the actual applicable annual management fee applied monthly. Past performance is not indicative of future results. A client’s return will be reduced by the advisory fees as described in Form ADV Part 2A and other expenses incurred by the account. For example, an annual advisory fee of 1% compounded quarterly over 10 years will reduce a gross 14.44% annual return to a net 13.32% annual return. Form ADV Part 2A is available upon request.

The performance figures reported herein are unaudited, may be based upon information obtained via electronic data sources (”feeds”) and may be subject to change. Data feeds from many of KCM clients’ selected custodians are obtained through third party sources, and are used to compare custodial data to KCM’s client account records as frequently as daily. Monthly, KCM reviews clients’ account holdings along with cash and share quantities against the custodial statements. In some instances, variances may exist between final audited custodial information and the information KCM obtains via such data feeds. Generally, any such variances are researched and reconciled within thirty days of the period end.

The information provided should not be considered a recommendation to purchase or sell any particular security. There is no assurance that any securities discussed herein will remain in a KCM portfolio at the time you receive this letter or that securities sold have not been repurchased. Allocations among industries, sectors and securities may vary and are subject to change without notice. Any securities discussed do not represent an account’s entire portfolio and, in the aggregate, may represent only a small percentage of an account’s portfolio holdings. It should not be assumed that any of the industry or sector allocation decisions mentioned, or securities transactions or holdings discussed were or will be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein.

Sector Weightings are subject to change at any time.  Sectors are based on the Global Industry Classification Standard (“GICS”) classification scheme and are measured as a percentage of the total COMPOSITE in terms of asset value as of the date indicated above.  Individual client portfolios may be different based on variations in security purchase price and date, and individual client restrictions.

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Allocations to various asset classes change over time and deviate from any stated or targeted percentages of a total portfolio as a result of market conditions and reallocation decisions. Therefore, nothing herein reflects a static portfolio allocation that will remain the same or match stated target allocations of asset classes.

Russell Investment Group is the source and owner of the Russell Index data contained or reflected in this material and all trademarks and copyrights related thereto.  The presentation may contain confidential information and unauthorized use, disclosure, copying, dissemination or redistribution is strictly prohibited.  This is a presentation of Kennedy Capital Management.  Russell Investment Group is not responsible for the formatting or configuration of this material or for any inaccuracy in Kennedy Capital Management’s presentation thereof.   

The Russell 2000® Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000®  Index is a subset of the Russell 3000® Index representing approximately 7% of the total market capitalization of that index, as of the most recent reconstitution. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership. The Russell 2000® is constructed to provide a comprehensive and unbiased small-cap barometer and is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true small-cap opportunity set.

The Russell 2000® Index is used as the benchmark.  The Index is unmanaged and represents total returns including reinvestment of dividends.  The benchmark is used for comparative purposes only and generally reflects the comparable risk or investment style of the Firm’s strategy.  The investment portfolios underlying the Index are different from the investments in the portfolios managed by the Firm.  Certain accounts may also use other benchmarks not listed in the GIPS composite report. The Verification and Performance Examination Report does not cover the benchmark returns included in the GIPS composite report.  Investors cannot invest directly in an Index.