| ANNUALIZED SINCE INCEPTION | QUARTERLY | YTD |
|---|---|---|
| 10.41% | 5.94% | 5.94% |
Bailard's Small Cap Value Strategy delivered 5.94% net returns in Q1 2026, outperforming during a quarter when AI capital spending concerns pressured growth stocks while benefiting value-oriented names. The strategy combines behavioral finance-based stock selection through their proprietary Bailard Ranking Model with broad-spectrum risk controls across 295 holdings. Small cap value emerged as the best performing equity style quadrant both for the quarter and trailing 12 months, with the portfolio's energy exposure benefiting from geopolitical tensions. The managers emphasize their focus on minimizing drawdowns through uncorrelated alpha sources to prevent emotional decision-making by investors. Looking forward, they anticipate a small cap value renaissance driven by accelerating earnings growth relative to large caps, attractive valuations, deregulatory tailwinds, manufacturing reshoring trends, and increased M&A activity. They view small cap infrastructure companies as potential beneficiaries of AI buildout, positioning like suppliers during the California gold rush rather than the miners themselves.
Small cap value stocks are positioned for a renaissance driven by accelerating earnings growth, attractive valuations, and structural tailwinds including deregulation, reshoring, and M&A activity.
The manager believes a small cap value renaissance is getting underway, driven by accelerating earnings growth, attractive valuations, deregulatory tailwinds, manufacturing reshoring, and increased M&A activity. Small cap value companies building AI infrastructure should benefit regardless of who wins the AI dominance battle.
| Date | Letter | Tickers | Keywords | Pitches | Quick Takes |
|---|---|---|---|---|---|
| May 1 2026 | 2026 Q1 | - | AI Infrastructure, Behavioral Finance, earnings growth, risk management, small cap, value | - | Bailard's small cap value strategy outperformed in Q1 as AI spending concerns hurt growth while benefiting value stocks. The team sees a small cap renaissance ahead driven by superior earnings growth, attractive valuations, and structural tailwinds including deregulation and reshoring. Their behavioral finance approach targets mispriced opportunities while managing downside risk. |
| Feb 6 2026 | 2025 Q4 | - | AI, Behavioral Finance, Micro Cap, Performance, quantitative, small cap, value | - | Bailard's Small Cap Value Strategy posted a 3.4% Q4 return, slightly outperforming its benchmark despite full-year underperformance. Value characteristics regained favor after October's junk stock rally faded. The strategy's behavioral finance-driven approach and AI-enhanced models position it well for 2026, with economic catalysts including tax cuts and Fed easing supporting small cap value prospects. |
| Oct 31 2025 | 2025 Q3 | MEI | Behavioral Finance, Micro Cap, Quality, small cap, value | - | Bailard's small cap value strategy lagged in Q3 as retail-driven junk stock rally favored speculative investments over quality fundamentals. The disciplined approach to behavioral finance and quality screening worked against performance as markets embraced risk-on sentiment. Despite near-term headwinds, attractive relative valuations and potential Fed easing may support future outperformance. |
| Jul 18 2025 | 2025 Q2 | - | Behavioral Finance, growth, Micro Cap, Relief Rally, Risk Appetite, small cap, Trade Policy, value | - | Bailard's Small Cap Value Strategy beat its benchmark in Q2 despite challenging conditions for quality-focused value investing. Trade war fears gave way to a relief rally favoring lower quality assets, but the strategy's micro cap exposure and Thriving on the Edge allocation helped performance. Significant valuation gaps between small value and large growth suggest opportunity ahead. |
| Mar 31 2025 | 2025 Q1 | - | Behavioral Finance, Esg, momentum, Recession, small caps, Trade Policy, value | - | Small cap value stocks are pricing in a severe recession while large caps barely discount a mild one, creating compelling relative valuations. Bailard outperformed by reducing momentum exposure as growth stocks corrected. Trade policy uncertainty poses near-term risks but deregulation could benefit small caps, while elevated value-growth spreads position the strategy for recovery. |
| Dec 31 2024 | 2024 Q4 | ITRI | Behavioral Finance, Deregulation, Esg, Micro Cap, small cap, value | ITRI | Bailard's small cap value strategy outperformed in Q4, benefiting from micro cap exposure ahead of expected Trump administration deregulation. Small value trades at extreme discounts to large growth, with superior 2025 earnings growth expectations. The strategy maintains ESG integration despite political headwinds and advocates permanent allocation over market timing to capture the asset class's historically superior long-term returns. |
| Sep 30 2024 | 2024 Q3 | SURG | Behavioral Finance, Esg, Outperformance, rates, small cap, value | - | Bailard's Small Cap Value Strategy matched benchmark returns in Q3 as Fed rate cut expectations drove style rotation favoring small cap value. The systematic behavioral finance approach delivered positive alpha through proprietary ranking models while ESG integration managed risk. Relative valuations remain historically attractive despite economic headwinds, positioning the strategy for continued outperformance as rate cuts materialize. |
| Jun 30 2024 | 2024 Q2 | LEGH | Behavioral Finance, Esg, Outperformance, small cap, value | - | Small cap value underperformed again in Q2 but Bailard's systematic approach delivered benchmark outperformance. Earnings estimates favor small value acceleration versus large growth deceleration in H2 2024. Valuations remain historically cheap while behavioral finance factors continue working. Strategy positioned for relative rally as performance disparities of this magnitude historically reverse. |
| QUARTER | THEMES | TAGS |
|---|---|---|
| 2026 Q1 |
Small CapsSmall cap value was the best performing equity style quadrant in Q1 and over the past 12 months. Small cap stocks are expected to grow earnings more rapidly than large caps over the coming year, which could further propel relative return gains while keeping valuations reasonable. |
Small Cap Value Earnings Growth Valuations Outperformance |
AIAI companies' ever-increasing capital spending plans spooked investors in Q1, with growth stocks suffering as a result. However, if AI expectations pan out, small cap value companies building data centers and infrastructure should be major beneficiaries, similar to suppliers during the California gold rush. |
AI Data Centers Infrastructure Capital Spending | |
EnergySmall cap value's meaningful energy exposure profited from rising energy prices driven by the U.S.-Iran conflict. Energy was mentioned as a sector where the portfolio had minor underweights that detracted from performance. |
Energy Oil Prices Geopolitical Sector Allocation | |
| 2025 Q4 |
AIAI emergence has created market hysteria and broad software sell-offs despite limited real-world automation success. Manager views AI as accelerating vendor concentration among dominant vertical software platforms rather than replacing them entirely. |
Artificial Intelligence Software Automation Technology |
SoftwareSoftware sector treated as monolith awaiting AI disruption, but incumbents with domain expertise and proprietary data are best positioned to integrate AI solutions. Early adopters historically capture more benefits than infrastructure providers. |
Enterprise Software SaaS Technology Digital Transformation | |
ValueTraditional value industries experiencing renewed enthusiasm as AI mania creates opportunities in older sectors like materials and industrials. Manager caught between cutting-edge tech and traditional value positioning. |
Value Investing Industrials Materials Contrarian | |
HotelsChoice Hotels represents asset-light, high-margin opportunity trading at distressed multiples due to cyclical headwinds. Company shifting toward higher-revenue segments with significant cash unlock potential from balance sheet optimization. |
Hospitality Franchising Asset Light Capital Allocation | |
| 2025 Q3 |
QualityThe strategy maintains focus on quality characteristics while avoiding junk stocks that rallied in Q3. Quality companies with strong fundamentals were left behind during the quarter's flight to lower-quality investments. |
Quality Fundamentals Earnings |
ValueSmall cap value stocks face headwinds despite attractive relative valuations versus large cap growth. The strategy emphasizes value characteristics but was challenged by market preference for speculative investments over traditional value metrics. |
Value Valuations Small Caps | |
| 2025 Q2 |
Small CapsSmall cap value stocks experienced a relief rally in Q2 as trade war fears subsided, with micro cap value stocks particularly benefiting from risk-on sentiment despite quality concerns. The strategy maintains significant exposure to micro cap stocks which helped performance during the quarter's indiscriminate rally. |
Small Cap Micro Cap Relief Rally Risk-on Value |
Trade PolicyTrade war fears drove markets to near bear market levels in early April before rapidly reversing as peak tariff concerns failed to materialize. Trade policy uncertainty remains a key factor affecting economic outlook and continues to overshadow potential currency benefits for large companies. |
Trade Wars Tariffs Policy Uncertainty Economic Impact | |
Risk AppetiteThe quarter was characterized by a shift from risk-off to risk-on sentiment following the trade scare, with lower quality junk stocks experiencing a relief rally. Growth equities typically outperform value in risk-on environments as elevated risk tolerance reduces investor scrutiny of long-duration earnings potential. |
Risk-on Risk-off Market Sentiment Quality Growth vs Value | |
ValueValue stocks underperformed growth in both large and small cap segments during the risk-on quarter, with the relative valuation differential between small value and large growth remaining at high levels. Value stocks can benefit when investors shorten investment time horizons due to higher current earnings and dividend yields. |
Value vs Growth Valuation Earnings Yield Dividend Yield | |
| 2025 Q1 |
Small CapsSmall cap stocks now appear to be discounting a severe recession based upon price declines, while large cap stocks are barely discounting a mild one. Small cap prices have shrunk even further, making them relatively more attractive than large cap stocks, particularly as their growth expectations remain very similar to large caps. |
Small Caps Value Recession Valuation Growth |
ValueGrowth stocks are largely momentum driven, and unsurprisingly lagged value stocks in Q1. This price momentum correction was long overdue, and while the underperformance of momentum stocks has been substantial, we believe it may have further to go. Value stocks of all sizes benefit from investors shortening their investment time horizons. |
Value Growth Momentum Correction Outperformance | |
Trade PolicyThough trade wars disproportionally hurt larger cap stocks due to their much greater international exposure, and the new administration's proposed deregulatory initiatives relatively help smaller companies, fear of recession eclipsed any other rational analysis during the period. Tariff-driven inflation is likely to be transitory, but a trade war definitely threatens economic growth if it persists. |
Trade Policy Tariffs Deregulation International Growth | |
| 2024 Q4 |
Small CapsSmall cap value stocks are positioned to benefit from deregulation under the Trump administration, particularly in banking and energy sectors. The strategy maintains an overweight allocation to micro cap stocks which served well in Q4. Small caps are expected to outperform large caps in 2025 with earnings growth expectations of 15.9% versus 13.5% for large caps. |
Deregulation Banking Energy Micro Cap Earnings Growth |
ValueSmall value stocks are extremely cheap relative to large cap growth, with the valuation differential at extreme levels. Current P/E to 20-year average shows small value at 100.9% versus large growth at 149.0%. Value stocks benefit from higher interest rates and shorter investment time horizons as they deliver higher current earnings and dividend yields. |
Valuation P/E Ratios Interest Rates Dividend Yields Relative Pricing | |
ESGESG investing faces political headwinds with small cap ESG companies underperforming non-ESG counterparts in Q4. However, the firm believes political concerns will fade over time and maintains that companies benefit from treating employees and customers well, effective resource stewardship, and good corporate governance. |
Political Headwinds Resource Stewardship Corporate Governance ESG Capture Sustainability | |
| 2024 Q3 |
ValueSmall cap value outperformed growth in Q3 after lagging earlier in the year, with the Russell 2000 Value Index up 10.2% versus 8.4% for growth. The strategy focuses on attractively valued, under-scrutinized companies that are irrationally mispriced. Relative valuations compared with large cap stocks remain historically cheap despite absolute valuations now hovering near historical averages. |
Value Small Caps Valuations Mispricing Outperformance |
RatesAnticipated Fed rate cuts triggered significant style rotation in Q3, with 10-year Treasury yields falling from 4.4% to 3.8% by August. Small cap stocks benefited from falling rates due to their higher average leverage. The strategy views falling interest rates as positive for small cap value stocks given their leverage characteristics. |
Interest Rates Fed Treasury Leverage Monetary Policy | |
| 2024 Q2 |
Small CapsSmall cap value stocks were the worst performing equity style quadrant for the second quarter in a row and are down slightly YTD. This is in stark contrast to large growth's almost +21% gain over the same period. Consensus earnings estimates for small value stocks predict accelerating growth in the second half of 2024. |
Value Underperformance Earnings Growth |
ValueSmall cap value stocks have historically outperformed in most portions of the economic cycle and typically do best in the early stages of economic recovery. Value stocks benefit from investors shortening their investment time horizons and higher interest rates that favor current earnings over distant potential payoffs. |
Outperformance Economic Cycle Interest Rates Earnings |
| Date | Pitch Type | Author | Ticker | Company | Industry | Sub Industry | Bull / Bear | Exchange | Keywords | Action |
|---|---|---|---|---|---|---|---|---|---|---|
| Dec 31, 2024 | Fund Letters | Bailard Small Cap Value Strategy | ITRI | Itron Inc | Technology | Electronic Equipment, Instruments & Components | Bull | NASDAQ | Energy Management, ESG, infrastructure, IoT, Resource Conservation, Smart meters, utilities, Water Management | Login |
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