Micro Cap Opportunities – Q2 2026 Commentary

Market Review

The second quarter of 2026 was a powerful risk-on rebound from first quarter, with the Russell Microcap® Index gaining 25.6% in the quarter. The rally was primarily driven by strength in artificial-intelligence and semiconductor companies. The macro backdrop stayed complicated: oil, which had spiked in early April as the Iran conflict disrupted supply through the Strait of Hormuz, round-tripped back to about $70 by quarter-end as a ceasefire took hold. Leadership was broad, with eight out of the eleven sectors in the micro-cap universe posting positive contributions, led by Information Technology, Communication Services, Industrials and Health Care.

 Performance Recap

The KCM Microcap Opportunities composite returned 28.03% (gross of fees) and 27.82% (net of fees) in Q2, outperforming the Russell Microcap® Index by 239 bps (gross of fees) and 219 bps (net of fees), respectively. Sector-level results were led by Materials (+183 bps), Industrials (+85 bps), and Energy (+82 bps), driven by favorable stock selection. These gains were partially offset by Health Care (-82 bps), Consumer Services (-38 bps), and Information Technology (-11 bps). Technology’s modest underperformance was entirely attributable to the portfolio’s underweight position, as stock selection within the sector outperformed the benchmark.

Data is as of 6/30/2026

The largest individual contributor to relative performance in Q2 was a manufacturer of specialized components, many of which incorporate beryllium and serve a range of end markets, including semiconductors. The company quickly resolved a manufacturing issue, and its strong quarterly results helped drive a significant increase in the share price during the quarter. The holding contributed 124 bps of relative outperformance.

The largest individual detractor from quarterly relative performance was a medical device company that develops, manufactures, and distributes products for cardiac and vascular surgery. Although headline Q1 revenue looked strong (18% Y/Y GAAP, 12% cc to $116.3M), the miss was in the growth engine: management cited lower-than-expected sales of their stent-graft-like device used in open surgery to treat a life-threatening tear in the aorta. The closing of the debt-funded acquisition during the soft-launch period added to the overhang, though shares recovered somewhat into quarter-end and got a lift from the June 29 AMDS full PMA approval. The company detracted 94 bps from relative performance during the quarter.

Outlook

As we enter the second half of the year, we continue to expect robust AI-related spending, supported by what appears to be an almost limitless demand for computing power. While this backdrop is highly constructive for many semiconductor companies, valuations remain important, and we believe many stocks already reflect strong multi-year growth expectations.

We remain cautious about select consumer areas, as inflation continues to pressure certain consumer groups, and we do not expect that dynamic to change meaningfully in the near term. We hope the Strait of Hormuz situation reaches a peaceful resolution; however, the recent escalation in the Middle East underscores that the region is likely to remain prone to conflict.

Within Industrials, we continue to expect a strong spending environment, particularly in aerospace and defense, and the strategy remains overweight the group. Recent turmoil in the Middle East and the ongoing war in Ukraine suggest that certain defense categories, especially munitions, will likely require meaningful investment to rebuild inventories.

Lastly, Biotech/Pharma remains a bright spot, with several large M&A transactions announced this year. We believe this activity highlights strong demand from large pharmaceutical companies for differentiated assets. We expect M&A could remain elevated as several high-profile drugs lose patent protection in the coming years, creating a need—and likely a desire—for pharmaceutical companies to rebuild their pipelines.

As always, thank you for your support. Please do not hesitate to reach out with any questions or concerns.

Sincerely,

Sean McMahon

Portfolio Manager

Anna Bunn, Ph.D.

Assistant Portfolio Manager

Important Disclosures

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. 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 full 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 and micro-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 Micro Cap Opportunities Composite contains fully discretionary micro cap accounts that are invested primarily in micro cap companies (market cap generally in line with Russell Microcap® index) that have opportunities to grow within their respective markets. For comparison purposes the composite is measured against the Russell Microcap® 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. Both 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.

GICS was developed by and is the exclusive property and a service mark of Morgan Stanley Capital International, Inc. (”MSCI”) and Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. (”S&P”) and is licensed for the use by KCM. Neither MSCI, S&P, nor any other party involved in making or compiling the GICS or any GICS classifications makes any express or implied warranties or representations with respect to such standard or classification (or the results thereof),and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability, and fitness for a particular purpose with respect to any of such standard or classification. Without limiting any of the foregoing, in no event shall MSCI, S&P, any of their affiliates or any third party involved in making or compiling the GICS or any GICS classifications have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.

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 KCM. Russell Investment Group is not responsible for the formatting or configuration of this material or for any inaccuracy in KCM’s presentation thereof.

The Russell Microcap® Index measures the performance of the microcap segment of the U.S. equity universe. Microcap stocks make up less than 2% of the U.S. equity market (by market cap, as of the most recent reconstitution) and consist of the smallest 1,000 securities in the small-cap Russell 2000® Index, plus the next 1,000 smallest eligible securities by market cap. The Russell Microcap® Index is constructed to provide a comprehensive and unbiased barometer for the microcap segment trading on national exchanges, while excluding lesser-regulated OTC bulletin board securities and pink-sheet stocks due to their failure to meet national exchange listing requirements. The Index is completely reconstituted annually to ensure new and growing equities are reflected and companies continue to reflect appropriate capitalization and value characteristics.

The Russell Microcap® 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.

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.