| ANNUALIZED SINCE INCEPTION | QUARTERLY | YTD |
|---|---|---|
| - | - | - |
Francis Gannon of Royce Investment Partners presents a compelling case for small-cap leadership in 2026, building on strong performance off the April 2025 low where Russell 2000 gained 42.4% and micro-caps surged 63.5%. The core thesis centers on a rare confluence of factors: small-cap valuations remain near 25-year lows relative to large-caps using EV/EBIT metrics, while earnings growth is forecasted to accelerate for small companies in 2026. Key catalysts include Fed rate cuts, a potential robust CapEx cycle from 100% depreciation allowances in recent legislation, and an anticipated shift in the AI trade from mega-cap providers to smaller companies supplying AI infrastructure including semiconductor components, data center energy providers, and construction firms. Biotechnology strength continued in 2025 driven by FDA fast-tracking and advances in gene editing and RNA therapies. Despite expected market volatility and economic uncertainty, Gannon sees the current environment as opportune for long-term small-cap investment at attractive valuations, with active management critical for sourcing the best opportunities.
Small-caps are positioned for sustained market leadership in 2026 driven by a rare confluence of relatively low valuations versus large-caps near 25-year lows and forecasted higher earnings growth, supported by Fed rate cuts, potential CapEx cycle, and shift in AI trade to smaller suppliers.
Manager enters 2026 with confidence that small-cap can build on its nascent market leadership despite uncertainty in the U.S. economy and geopolitical front. Sees current period as opportune time to invest in select small-caps for the long run at attractive valuations.
| Date | Letter | Tickers | Keywords | Pitches | Quick Takes |
|---|---|---|---|---|---|
| Jan 2 2026 | 2025 Q4 | - | AI, Biotechnology, Capex, earnings, Micro-caps, Russell 2000, small caps, Valuations | - | Small-caps demonstrated strong performance off the April low with Russell 2000 up 42.4% and micro-caps leading with 63.5% gains. Manager sees compelling setup for 2026 leadership driven by attractive relative valuations near 25-year lows versus large-caps and forecasted accelerated earnings growth for small-cap stocks. Manager anticipates a shift in the AI trade from mega-cap beneficiaries to smaller companies that supply the AI revolution, including semiconductor components, energy providers for data centers, and construction companies building them. Expects emphasis to shift from AI providers to companies benefiting from AI adoption in 2026. Biotech stocks were especially strong in 2025, driven by FDA fast-tracking drugs and breakthrough therapy designations. Performance was supported by attractively low valuations at the beginning of 2025 and advances in gene editing, RNA therapies, and AI-enhanced drug discovery. The Big Beautiful Bill allows companies 100% depreciation on research and CapEx, suggesting a robust CapEx cycle in 2026. Such cycles have typically benefited small-cap stocks, though the market has not yet recognized this opportunity. |
| Oct 15 2025 | 2025 Q3 | - | Artificial Intelligence, industrials, Manufacturing, reindustrialization, small caps | - | Royce highlights strong small-cap performance led by industrials, technology, and aerospace as AI data center expansion and U.S. reindustrialization create new demand. The fund remains overweight in pro-cyclical sectors and sees picks and shovels beneficiaries from AI-driven capex, while maintaining confidence in long-term small-cap outperformance. |
| Jul 2 2025 | 2025 Q2 | - | Balance Sheets, M&A, Mean reversion, neglect, small caps | - | The letter underscores the opportunity set in small-cap equities following prolonged underperformance and investor neglect. Management argues that balance-sheet strength and earnings durability are improving beneath weak sentiment. Mean reversion and M&A activity are cited as potential catalysts. |
| Apr 2 2025 | 2025 Q1 | - | - | - | |
| Jan 22 2025 | 2024 Q4 | - | - | - | |
| Oct 1 2024 | 2024 Q3 | - | - | - |
| 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 |
BiotechnologyHealthcare industry positioned for catch-up growth after several years of below-trend performance. Government spending expected to increase relative to feared cuts, with companies signaling improvement in revenue growth. Focus on 'picks & shovels' businesses serving the industry. |
Life Science Tools Pharmaceuticals CRO & CDMO Healthcare Research | |
Infrastructure SpendingPlaying on the continued theme of infrastructure spending, defense and energy sustainability, positions in Industrial and Energy sectors including Oshkosh, Coterra, OSI Systems, and Herc Holdings added positively to performance. |
Defense Energy Industrial Government Sustainability | |
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 Q3 |
Industrial Recovery |
|
InfrastructureFiera Capital enhanced capabilities in infrastructure as a segment where they have deep expertise and privileged access to opportunities. This represents a strategic focus area for capital allocation. |
Infrastructure Private Markets Capabilities | |
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 |
SmallCaps |
| Date | Pitch Type | Author | Ticker | Company | Industry | Sub Industry | Bull / Bear | Exchange | Keywords | Action |
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