| ANNUALIZED SINCE INCEPTION | QUARTERLY | YTD |
|---|---|---|
| - | - | - |
ClearBridge's Small Cap Growth Strategy underperformed in Q4 2025 as biotech rallied 28.1% while their IT holdings faced earnings disappointments, though they remain encouraged by improving contributions from newer investments. The strategy was active with 29 new positions and 19 exits, redeploying capital into businesses with idiosyncratic growth levers. Despite another challenging year for active managers with less than 20% of small cap growth strategies outperforming, the managers are optimistic about 2026. For the first time in over a decade, small caps exceeded large caps in earnings growth in Q3, with forecasts showing small cap earnings will handily exceed large caps in 2026. The managers expect a broadening of market leadership beyond AI infrastructure to traditional industries, with AI productivity benefits becoming more visible across sectors. Capital markets are accelerating with improving IPO activity and rebounding M&A volumes. With relative valuations still attractive and the asset class positioned for stronger performance, they believe the prolonged period of factor dislocation sets the stage for improved forward returns.
Small cap growth stocks are positioned for stronger performance in 2026 as earnings growth is forecasted to exceed large caps, relative valuations remain attractive, and market leadership is expected to broaden beyond the narrow AI infrastructure theme that has dominated recent years.
The manager is optimistic about the 2026 backdrop for small cap growth stocks after several years of narrow leadership and extreme performance dispersion. They expect a broadening of growth leadership across traditional industries and believe AI productivity benefits will become more visible across sectors. With small cap earnings growth set to eclipse large cap peers and relative valuations at attractive levels, they believe the asset class is poised for stronger performance.
| Date | Letter | Tickers | Keywords | Pitches | Quick Takes |
|---|---|---|---|---|---|
| Jan 15 2026 | 2025 Q4 | BE, BETA, BHVN, DUOL, DYN, ELF, GKOS, IBP, INSM, LRN, NVS, PEN, PTGX, QLYS, RBC, SGRY, SSD, TREX, VRNS, WIX | active management, AI, Biotechnology, Capital markets, earnings, growth, small cap, Valuations |
PTGX SIMP |
The manager expects 2026 could mark a period where productivity and monetization benefits of AI become more visible across industries. Several holdings are actively leveraging AI to improve efficiency, offer new products, or provide solutions to secure and manage critical data that AI utilizes. Biotech sector rebounded strongly behind positive clinical and commercial outcomes, healthy M&A activity, performance mean reversion and lower interest rates. The Russell 2000 Growth Biotech Index returned 28.1% in Q4, with the manager adding modestly to relative performance despite benchmark biotech constituents being up over 40% for the year. Capital markets appear to be accelerating with IPO activity improving after a multiyear lull and M&A volumes rebounding. This environment is historically favorable to the strategy, with recent transactions highlighting sophisticated buyers deploying capital at depressed valuations. Small cap earnings growth is forecasted to handily exceed large caps in 2026, with the third quarter marking the first time in over a decade that small caps exceeded large caps in earnings growth. The manager believes the asset class is poised for stronger performance with relative valuations still at attractive levels. |
| Oct 9 2025 | 2025 Q3 | CLBT, CRDO, KTOS, RNA | Artificial Intelligence, defense, growth, healthcare, small caps |
BE US KD US |
The ClearBridge Small Cap Growth Strategy lagged benchmarks as speculative retail-driven rallies lifted low-quality stocks. The team added to high-conviction industrial and healthcare names like Kratos, Insmed, and Bloom Energyeach benefiting from AI, defense, and electrification trends. Management remains optimistic about broader participation as policy stability and rate cuts emerge. |
| Jul 29 2025 | 2025 Q2 | BOOT, BWXT, CASH, RYTM, UTI, VOYG, WING | growth, market breadth, scalability, small caps, valuation | - | The fund discusses improving conditions for small-cap growth as market breadth expands and risk appetite normalizes. Management emphasizes companies with scalable business models and strong competitive positions. Small caps are viewed as offering asymmetric upside from depressed valuations. |
| Apr 5 2025 | 2025 Q1 | AROC, GERN, GKOS, HIMS, KRMN, RKLB | - | - | |
| Jan 9 2025 | 2024 Q4 | CWAN, FLR, MOD, OSCR, TGTX | - | - | |
| Sep 30 2024 | 2024 Q3 | ANF, FTAI, OS, WTFC | - | - | |
| Jul 18 2024 | 2024 Q2 | BPMC, FN, GLBE, PCVX, ROAD, TREX, VRNS, XPRO | - | - | |
| Apr 23 2024 | 2024 Q1 | CNMD, DUOL, ELF, INSM, INTA, MEDP, RDNT, SMCI, VKTX | - | - | |
| Jan 13 2024 | 2023 Q4 | BLKB, FF0 GR, IBP, MIRM, NARI, WMT | - | - | |
| Aug 10 2023 | 2023 Q3 | AEL, KVYO, LNTH, MGRC, NCNO | - | - | |
| Jun 30 2023 | 2023 Q2 | BE, BJ, FFO GR, TRUP | - | - | |
| Mar 31 2023 | 2023 Q1 | DH, ESI, LTHM | - | - |
| QUARTER | THEMES | TAGS |
|---|---|---|
| 2025 Q4 |
AIAI has been integrated into RGA's research process through tools like NotebookLM, Gems in Gemini, and Claude Code. The firm views AI as a force multiplier for human judgment rather than a replacement, emphasizing the Kasparov Law principle. They believe the market narrative around AI displacement is swinging to unhelpful extremes, creating investment opportunities. |
Machine Learning Automation Software Productivity Innovation |
Capital MarketsExchanges operate as essential high-margin toll roads for the economy with immense operating leverage. They benefit from trading volume flowing directly to profits with minimal extra cost and have natural inflation hedging through transaction values. |
Exchanges Nasdaq CBOE Trading Fees Market Data | |
Small CapsSmall caps getting strong start in 2026 supported by easing monetary conditions and constructive fiscal backdrop. Small caps more sensitive to economic cyclicality which is overdue for expansion. Expected to grow at better pace than large caps in 2026 after long period of underperformance. |
Value Growth Cyclical Monetary Policy Fiscal Policy | |
TechnologyHoldings span social media, online search, cloud computing and e-commerce including select Magnificent 7 positions. They also own semiconductor companies at reasonable valuations, including picks and shovels businesses like Applied Materials with strong competitive positions and long track records of value creation. |
Technology Semiconductors Cloud Social Media E-commerce | |
| 2025 Q3 |
AIAI has been integrated into RGA's research process through tools like NotebookLM, Gems in Gemini, and Claude Code. The firm views AI as a force multiplier for human judgment rather than a replacement, emphasizing the Kasparov Law principle. They believe the market narrative around AI displacement is swinging to unhelpful extremes, creating investment opportunities. |
Machine Learning Automation Software Productivity Innovation |
DefenseThe team initiated a position in Curtiss-Wright, believing the company is entering a period where multiple near-term growth drivers are converging, including rising defense budgets, commercial aerospace production ramps, nuclear power plant life extensions and new builds, and submarine production. |
Defense Budgets Aerospace Nuclear Submarines | |
Growth |
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HealthcareHealthcare was the strongest relative contributor in the quarter with holdings increasing nearly +16% compared to benchmark returns of roughly +12%. Exact Sciences was acquired for a significant premium by Abbott Laboratories resulting in an +86% return, while other strong performers included Tarsus Pharmaceuticals, Glaukos following approval of a new product, Penumbra, and Repligen driven by strong earnings results. |
M&A Product Approval Earnings Biotech | |
Small CapsSmall caps getting strong start in 2026 supported by easing monetary conditions and constructive fiscal backdrop. Small caps more sensitive to economic cyclicality which is overdue for expansion. Expected to grow at better pace than large caps in 2026 after long period of underperformance. |
Value Growth Cyclical Monetary Policy Fiscal Policy | |
| 2025 Q2 |
SmallCap |
| Date | Pitch Type | Author | Ticker | Company | Industry | Sub Industry | Bull / Bear | Exchange | Keywords | Action |
|---|---|---|---|---|---|---|---|---|---|---|
| Oct 9, 2025 | Fund Letters | Aram Green | BE US | Bloom Energy Corp. | Industrials | Electrical Equipment | Bull | NYSE | AI, data centers, Electrification, energy transition, Fuel cells, growth, Margins, valuation | Login |
| Oct 9, 2025 | Fund Letters | Aram Green | KD US | Kratos Defense & Security Solutions, Inc. | Information Technology | Aerospace & Defense | Bull | NASDAQ | Aerospace, backlog, Defense, Drones, growth, Hypersonic, Margins, valuation | Login |
| Jan 15, 2026 | Fund Letters | Aram Green | PTGX | Protagonist Therapeutics, Inc. | Health Care | Biotechnology | Bull | NASDAQ | Blockbuster, Clinical, Immunology, Oraldrugs, pipeline | Login |
| Jan 15, 2026 | Fund Letters | Aram Green | SIMP | Simpson Manufacturing Co., Inc. | Industrials | Building Products | Bull | New York Stock Exchange | Buildingproducts, compounding, Housing, Margins, marketshare | Login |
| TICKER | COMMENTARY |
|---|---|
| BE | Bloom Energy is a provider of solid oxide fuel cells that play a critical role in delivering clean, reliable, always on power at scale. AI data centers require an enormous amount of power and one of the key challenges to date has been the inability of power grids to supply the necessary electricity to meet the constant and growing demands from AI workloads. Bloom's Energy Server fuel cells help address this issue, generating cost-efficient, reliable power onsite, converting fuels like natural gas, biogas and hydrogen into electricity without combustion. During the quarter, the company announced better than expected results with added optimism from a $5B partnership with Brookfield as the preferred onsite power provider for the company's global AI factories. |
| BETA | BETA Technologies is an aerospace and defense company developing electric aircraft, propulsion systems and charging infrastructure for government, logistics and commercial applications. Its vertically integrated model, lower operating cost structure and focus on conventional takeoff aircraft provides multiple avenues for long-term growth. |
| DUOL | I have followed the company closely since the IPO since my wife was an avid user, not wanting to break her streak in learning Italian. I thought growth would drop off a cliff after COVID as happened with many other companies, and yet, quarter after quarter the company continued to execute. In fact, there are only four companies I can find that have grown revenues greater than 30% for at least the last 20 quarters in a row – MercadoLibre, Axon, Hims, and Duolingo. To have that growth endurance, you've got to be doing something right! Well, the stock was down almost 70% after the valuation got far too rich and management made it very clear they were prioritizing learning over monetization for 2026. That is the right call in my opinion, considering what the core competency of the company is. Duolingo shouldn't be thought of as a language learning app, it's an engagement machine that happens to educate. In service of its mission to make education widely available, it built the data-driven muscle of engaging users. To learn anything, the most difficult part is motivation and that is what Duolingo is good at. In fact, almost 40% of monthly users log into the app every day. For context, Snapchat is at 50%! You're telling me that an app that teaches you Spanish almost has the same level of engagement as the app where teens do all of their communication? As the company broadens its education subjects like math, music, chess, and other areas, retention should increase even more. If you get bored of learning a language, you can hop over to play some chess. And AI will allow the company to create better content for their current subjects and accelerate the broadening of the platform. Paired with the engagement muscle, Duolingo very well could become a must-have app for learning all sorts of things. This vision will take time but it's actually the exact vision of the CEO/founder. The main bear cases are AI translation and that no one actually learns anything. On the latter, it's up to the user. Duolingo can't force you to learn anything. But yes, education apps typically have very high churn. The fact that Duolingo is able to increase paid subs at a rapid rate despite the leaky bucket is incredibly impressive. On the former, language learning isn't all about practicality. For a large portion of users, they're trying to learn English and they actually really want to understand the language rather than use AI translating glasses. And secondly, Duolingo includes a structure for habit formation. The company is already embedding AI into its content program with its Max Tier so as the models improve, so should Duolingo's product. It's easy to say that high engagement, alone, isn't a moat and I'd agree but the company's core competency is A/B testing and therefore, the product improves at a much higher rate than competitors as it scales. We paid ~18x FCF, inclusive of stock-based comp. That's not super cheap but for a company with an exceptional founder and growth endurance rivaling our long-time holdings, MercadoLibre and Axon, we decided to finally start a position. |
| DYN | Dyne Therapeutics is a biotechnology company developing late-stage RNA-based therapies for muscular dystrophy conditions. With limited existing treatment options and encouraging early data, upcoming clinical milestones represent meaningful potential value creation opportunities. |
| ELF | e.l.f. Beauty's earnings report included a decline in core domestic sales growth and fiscal year guidance below expectations. We continue to hold the stock, as the company offers a strong product set addressing a favorable spending category, though additional progress is needed to restore positive fundamental and share-price performance. |
| GKOS | Glaukos following approval of a new product |
| IBP | Installed Building Products installs fiberglass insulation into the walls of new homes and apartment buildings. Given the weak housing market, it grew earnings modestly in 2025, but even that trounced expectations. IBP has exceptional management and has generated good returns for us over the past four years. |
| INSM | Insmed Inc., a biopharmaceutical company focused on developing and commercializing therapies for patients with rare diseases, advanced 21% over the quarter. We have been pleased with the launch of Brensocatib, a first-in-class oral medication that treats non-cystic fibrosis bronchiectasis. The reception has been positive from physicians, patients, and payers. |
| LRN | Stride is an education technology company that provides online education to K-12 students through virtual public schools and learning programs. The stock sold off more than 50% on earnings due to a failed platform upgrade that resulted in major student enrollment losses, poor customer experience, and high withdrawal rates. Given the seasonality inherent in their business model (fall enrollment is the main driver of fiscal year results), investors quickly moved on with the lack of an imminent catalyst until next fall. We eliminated our position during the quarter. |
| NVS | During the quarter, Chinese online discount retailer Vipshop Holdings Ltd., Canadian auto parts manufacturer Magna International and Swiss pharma Novartis AG were sold as each reached target valuation limits. |
| PEN | Other strong performers in the quarter, primarily driven by strong earnings results, included Penumbra |
| PTGX | Protagonist Therapeutics is a biopharmaceutical company that currently has two internally discovered, clinically derisked drugs likely to launch with their partners in the near future, which we believe offer blockbuster potential — particularly an oral version of a well adopted injectable mechanism treating a range of immunology and inflammation conditions. |
| RBC | RBC Bearings, Inc. (RBC) manufactures engineered precision bearings and related products for customers in the aerospace, defense, and industrial markets. It is a market leader with a strong reputation for technical capabilities, product quality, and on-time delivery. RBC outperformed in 4Q as its quarterly results beat consensus estimates on both revenue and EPS. Its Aerospace and Defense business (A&D, 44% of total revenue) was particularly strong, essentially 'firing on all cylinders.' Management expects strong growth in its A&D backlog and is in the process of adding capacity to meet demand. Growth in its Industrial business (56% of total revenue) remains sluggish, but management has significantly improved the profit margins of this business and is now in the process of implementing growth initiatives. We continue to like RBC's leadership team, well-established strategic playbook, as well as its opportunities for growth and capital deployment. |
| SSD | Simpson Manufacturing is a leading building products company focused on connectors, truss plates and fasteners used in residential construction. With a dominant share in its core markets, attractive margins and opportunities to expand into adjacent categories, Simpson has steady compounding potential over time, in our view. |
| TREX | TREX Company, a leader in composite decking, was our biggest laggard in Industrials during the fourth quarter, as an increasingly competitive environment and weaker end-market trends led to poor Q3 results. TREX saw business fall off after Labor Day, which is inconsistent with results from other peers and surveys. It was quite surprising and may be a function of its higher DIY business. Regardless, this contradicts our thesis, so we exited the position. |
| VRNS | security software company Varonis and Wix.com, a website and application creation platform, both of which had minor disappointments that led to material stock price overreactions. We continue to have conviction in the idiosyncratic growth opportunities at each of these profitable and attractively valued businesses, both of which can benefit from the proliferation of AI adoption. |
| WIX | Wix.com Ltd. is a leading provider of cloud-based web-development platform for micro-businesses. Shares of Wix declined 41.5% during the fourth quarter and ended the year down 51.9% due to a quarterly earnings report that emphasized greater-than-expected investment behind their new acquisition, the vibe-coding startup, Base44. |
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