The curated database of hedge funds that publish investor letters. Research by geography, strategy, and schools of thought.
| # | Fund | Strategy | Style | Geography | AUM | Latest Letter |
|---|---|---|---|---|---|---|
Small-caps maintained market leadership in Q2 2026 with the Russell 2000 up 21.5% and Russell Microcap up 25.6%. Earnings growth drove over 60% of returns, fueled by AI infrastructure spending benefiting small-cap suppliers. Despite strong performance, valuations remain near 25-year lows versus large-cap while earnings fundamentals improve. The combination of attractive valuations and accelerating earnings supports continued small-cap outperformance.
Small-cap stocks are positioned to maintain market leadership based on attractive relative valuations near 25-year lows and accelerating earnings growth driven by the AI buildout filtering through to small-cap suppliers.
The manager maintains a bullish outlook on small-cap stocks, arguing that the combination of attractive valuations and strong earnings growth should be sufficient to keep the asset class in a leadership role. Despite some commentators questioning sustainability, the manager believes relatively attractive valuations near 25-year lows versus large-cap, combined with improving earnings fundamentals and consensus estimates pointing to faster growth ahead, support continued small-cap outperformance. The manager views higher volatility as an opportunity rather than a concern, allowing disciplined long-term investors to enhance returns.
As of Jun 30, 2026
Royce & Associates, LP operates as a subsidiary of Franklin Resources, Inc. (Franklin Templeton) and serves 940 clients with approximately $12.5-12.7 billion in assets under management. The firm has established itself as a pioneer in small-cap investing with over 50 years of experience in this specialized market segment. Led by CEO and Co-Chief Investment Officer Christopher D. Clark and Co-Chief Investment Officer Francis Gannon, the firm maintains a team of experienced portfolio managers with deep expertise in small-cap analysis. The firm demonstrates strong alignment with clients through approximately $102 million in employee and family investments alongside client assets.
Royce Investment Partners specializes exclusively in small-cap investing since 1972, employing an active, bottom-up, risk-conscious, and fundamental investment approach. The firm scours the large and diverse universe of small-cap companies for businesses that look mispriced and underappreciated with a discernible margin of safety. Portfolio managers focus primarily on balance sheet strength, cash flow characteristics, and returns on invested capital when choosing stocks. The firm seeks stocks trading at a discount to their estimate of worth as businesses, emphasizing conservatively financed companies with steady earnings and positive free cash flow, often overlooked by larger institutions.
Lead Portfolio Manager
Moderate Conviction Bullish
Market Conviction
The letter demonstrates moderate-to-high conviction through specific data-driven arguments about valuations (EV/EBIT at 25-year lows), earnings growth (60%+ of returns from EPS growth), and clear thematic positioning (AI infrastructure suppliers). The manager explicitly states 'bolsters our conviction' and makes falsifiable claims about small-cap leadership sustainability. However, no individual positions are named or sized, and the letter discusses the broad small-cap universe rather than a concentrated portfolio. The absence of specific holdings and position sizing caps the score below 0.70, despite the confident analytical framework.
Growth Outlook
The manager expresses strong optimism about small-cap markets, describing the opportunity set as compelling with 'many compelling opportunities for active, fundamentals-driven investors.' The letter characterizes the environment as a 'sweet spot' and argues that small-caps should maintain leadership. While geopolitical tensions and inflation are acknowledged, the overall framing is decidedly positive with phrases like 'robust period,' 'roared back,' and emphasis on strong fundamentals supporting continued outperformance.
Risk Appetite
The manager demonstrates a clear risk-on posture, stating that investment teams are 'enjoying a sweet spot between owning holdings that are doing well while also finding what they think are excellent long-term opportunities.' The letter explicitly mentions owning 'several companies that have been reaping the benefits' of AI spending and emphasizes active deployment into the small-cap universe. The tone suggests full investment with selective additions rather than defensive positioning.
Capital Deployment
The letter describes teams 'finding what they think are excellent long-term opportunities' and being in a 'sweet spot' between existing holdings and new opportunities, suggesting selective deployment activity. However, no specific cash level changes are provided, and the language emphasizes both holding existing positions that are 'doing well' and finding new opportunities, indicating rotation and selective additions rather than aggressive net deployment. The tone suggests active engagement but not aggressive cash reduction.
Forward Guidance
The manager signals continued deployment bias, stating that teams are 'finding what they think are excellent long-term opportunities in the wide and diverse selection universe of small- and micro-cap stocks.' The letter argues against concerns about sustainability and makes the case for continued small-cap leadership, suggesting ongoing commitment to the asset class. However, the guidance is more about maintaining positions and selective additions rather than aggressive new deployment.
Language Signal
The language is predominantly bullish with terms like 'compelling opportunities,' 'attractive valuations,' 'robust,' 'impressive,' 'strong,' and 'sweet spot' appearing throughout. Risk language is present but balanced and contextualized (geopolitical tensions, inflation, volatility), with risks often reframed as opportunities. The letter counters bearish arguments from 'commentators' with data-driven rebuttals. The net balance tilts meaningfully bullish while maintaining analytical objectivity.
Perceived Risk
The manager acknowledges several specific risks including unresolved geopolitical tensions, lingering inflation, volatile energy prices due to the Iran war, and data center energy controversies around AI. These risks are named and discussed with some detail across multiple paragraphs. However, the risks are contextualized within a broader positive framework and are not presented as systemic threats. The manager also addresses and dismisses concerns about small-cap sustainability raised by 'commentators.' The risk discussion is substantive but not central to the letter's thesis.
Opportunity Density
The manager characterizes the opportunity set as abundant, stating that teams are in a 'sweet spot' and 'finding what they think are excellent long-term opportunities in the wide and diverse selection universe of small- and micro-cap stocks.' The letter emphasizes that 'the small- and micro-cap universe still has more profitable companies than the Russell 1000 or S&P 500 Indexes' and that the combination of valuations and earnings 'continues to offer many compelling opportunities.' This language indicates a rich, broad opportunity set across the small-cap universe.
Time Horizon
The manager explicitly emphasizes a long-term orientation, stating the environment 'continues to offer many compelling opportunities for active, fundamentals-driven investors with a long-term horizon.' The letter discusses multi-year themes like the AI buildout and argues that 'earnings growth ultimately drives long-term returns.' Volatility is framed as an ally for 'disciplined investors with a long-term horizon to take advantage of short-term movements to potentially enhance market-beating results over the long run.' The thesis is built around multi-year valuation mean reversion and earnings cycles rather than near-term catalysts, indicating a 2-4 year outlook.
Top Conviction Themes
Key Catalysts
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