| ANNUALIZED SINCE INCEPTION | QUARTERLY | YTD |
|---|---|---|
| - | - | - |
Royce Investment Partners maintains a constructive long-term outlook for small-cap stocks despite near-term volatility from geopolitical tensions and economic uncertainties. Small-caps demonstrated resilience in 1Q26, with the Russell 2000 gaining 0.9% and Russell Microcap advancing 1.5% while large-cap indexes declined significantly. This marked the fourth consecutive quarter of micro-cap outperformance and continued market leadership that began off the April 2025 low. The firm's optimism is anchored by three key factors: relative valuations for small-caps versus large-caps remain near their lowest levels in 25 years using EV/EBIT metrics, earnings growth forecasts favor small-caps in 2026, and structural tailwinds from infrastructure spending and AI adoption provide long-term support. The Infrastructure Investment and Jobs Act has $600 billion yet to be spent, while AI creates opportunities for small-cap suppliers and companies using AI for innovation. Small-cap value has outperformed growth for three consecutive quarters, aligning with historical patterns. The firm views current conditions as an opportune time to build small-cap allocations at attractive valuations for long-term investors.
Small-cap stocks are positioned for continued leadership based on attractive relative valuations versus large-caps near 25-year lows, forecasted better earnings growth, and structural tailwinds from infrastructure spending and AI adoption, despite near-term geopolitical and economic uncertainties.
Cautious in the near term but constructive on the long term, with measured optimism despite volatile and unsettling conditions. The firm believes factors driving positive long-term returns and market leadership remain in place, emphasizing the opportunity to build small-cap allocations at attractive valuations during this opportune time for long-term investing.
| Date | Letter | Tickers | Keywords | Pitches | Quick Takes |
|---|---|---|---|---|---|
| Apr 1 2026 | 2026 Q1 | - | AI, earnings, energy, Geopolitical, infrastructure, small caps, Valuations, value | - | Small-caps extended their leadership in 1Q26 despite geopolitical volatility, with Russell 2000 up 0.9% while large-caps declined. Royce sees compelling long-term opportunities driven by near 25-year low relative valuations, superior earnings growth forecasts, and structural tailwinds from infrastructure spending and AI adoption. Current environment offers attractive entry point for patient capital. |
| Jan 2 2026 | 2025 Q4 | - | AI, Biotechnology, Capex, earnings, Micro-caps, Russell 2000, small caps, Valuations | - | Royce's Francis Gannon makes a compelling case for small-cap leadership in 2026, citing valuations near 25-year lows versus large-caps combined with forecasted earnings acceleration. Key drivers include Fed rate cuts, potential CapEx cycle from tax policy, and AI trade shift to smaller suppliers. Strong micro-cap performance off April lows demonstrates emerging leadership despite market volatility. |
| Oct 15 2025 | 2025 Q3 | AIR, AMSC, ATRO, CECO, CRK, FTI, GLOB, KD, KN, KTOS, LAUR, LFMD, MOD, OPRX, PRIM, PSQH, REZI, SOI, SWSS, UCTT | defense, industrials, infrastructure, Outperformance, semiconductors, small caps, technology, value | - | Royce Small-Cap Opportunity Fund outperformed with 12.93% quarterly returns driven by pro-cyclical positioning in Industrials and Technology. The portfolio focuses on infrastructure, AI data centers, and U.S. reindustrialization themes. Strong performance in aerospace & defense and semiconductors offset IT services weakness. Managers maintain high confidence given performance strength and abundant new opportunities in their core investment themes. |
| Jul 2 2025 | 2025 Q2 | - | Recovery, Resilience, Russell 2000, small caps, tariffs, valuation, value, volatility | - | Small-caps rebounded 8.5% in 2Q25 despite volatility, trading at 25-year low valuations versus large-caps. Historical patterns favor value over growth in sustained recoveries, with small-caps emerging from earnings recession. Policy uncertainty around tariffs and politics creates near-term headwinds, but attractive valuations and economic resilience support cautious optimism for patient capital. |
| Apr 2 2025 | 2025 Q1 | AAPL, AMZN, GOOGL, META, MSFT, NVDA, TSLA | Corrections, Russell 2000, small caps, valuation, value, volatility | - | Royce sees Q1 2025 small-cap correction as creating compelling long-term opportunities. Russell 2000 trades at significant discount to large-caps with stronger earnings growth expected. Recent Magnificent 7 underperformance suggests market broadening that historically benefits small-caps. Despite tariff and inflation concerns, firm remains highly constructive on small-cap leadership potential for patient investors. |
| Jan 22 2025 | 2024 Q4 | AEHR, AMSC, ASPN, ASTH, AZTA, CECO, CRS, DSP, EVH, FARO, GTLS, HCSG, KD, KN, LAKE, MATV, PRIM, SLWS, SOLR, SRCL | energy, industrials, Infrastructure Spending, Onshoring, small caps, technology, value | - | Royce Small-Cap Opportunity Fund outperformed benchmarks with 3.6% quarterly and 10.3% annual returns, led by strong Energy sector performance and successful stock selection in Technology and Industrials. The fund is positioned for multi-year themes including infrastructure spending, manufacturing onshoring, and reduced regulatory interference, remaining bullish on select small-cap opportunities in 2025. |
| Oct 1 2024 | 2024 Q3 | - | financials, Outperformance, rates, small caps, value | - | Small-caps surged 9.3% in Q3, outpacing large-caps as value stocks led by Financials drove performance. Following the Fed's rate cut, historical patterns suggest continued outperformance ahead. With relative valuations near 25-year lows and absolute metrics below long-term averages, small-caps appear positioned for sustained leadership after years of underperformance. |
| QUARTER | THEMES | TAGS |
|---|---|---|
| 2026 Q1 |
Small CapsSmall-cap stocks demonstrated resilience and leadership in 1Q26, with the Russell 2000 gaining 0.9% and Russell Microcap advancing 1.5% while large-cap indexes declined. This marked the fourth consecutive quarter of micro-cap outperformance and continued the market leadership that began off the April 2025 low. The 12-month period showed impressive gains with Russell Microcap up 45.8% and Russell 2000 up 25.7%. |
Russell 2000 Microcap Outperformance Leadership Valuations |
AIThe firm sees an important shift in the AI trade offering opportunities for smaller companies in two ways: first, as critical suppliers to the AI revolution including semiconductor component makers, energy providers for data centers, and construction companies building them; second, companies using AI to drive innovation, automation, and efficiency which represents a particularly promising long-term trend. |
Semiconductors Data Centers Innovation Automation Suppliers | |
Infrastructure SpendingThe ongoing effect of the 2021 Infrastructure Investment and Jobs Act continues to provide support, with the U.S. still in early stages of spending from the IUA and associated Broadband Equity Access and Deployment Program. Of the $1.2 trillion earmarked for infrastructure spending, about half is yet to be spent, supporting long-term reindustrialization trends. |
IUA BEAD Broadband Reindustrialization Rural | |
ValueSmall-cap value outperformed small-cap growth for the third consecutive quarter, up 5.0% versus a loss of 2.8% in 1Q26. Value has assumed leadership off the April 2025 low, gaining 47.9% versus 42.0% for growth. The performance aligns with historical patterns where value typically outperforms in down markets or expanding economies. |
Russell 2000 Value Outperformance Historical Patterns Leadership | |
EnergyEnergy was one of four positive sectors in the Russell 2000 during 1Q26, making the biggest positive contribution alongside Industrials and Materials. The sector benefited despite geopolitical tensions when Iran closed the Strait of Hormuz, creating concerns about global energy supplies and market volatility. |
Oil Gas Equipment Services Geopolitical | |
| 2025 Q4 |
Small CapsSmall-caps demonstrated strong performance off the April low with Russell 2000 rising 42.4% through year-end. Manager sees compelling case for sustained leadership in 2026 driven by relatively low valuations versus large-caps and forecasted higher earnings growth. Valuations remain near 25-year lows relative to large-caps despite strong 2025 performance. |
Russell 2000 Valuations Earnings Leadership Outperformance |
AIManager anticipates shift in AI trade benefiting smaller companies through two developments: recognition of small-cap businesses supplying AI revolution including semiconductor components and energy providers, and emphasis shifting from mega-cap AI providers to companies benefiting from AI applications. Expects this transition to support small-cap performance in 2026. |
Semiconductors Data Centers Applications Supply Chain | |
BiotechnologyBiotech stocks were especially strong in 2025 driven by FDA fast-tracking drugs and breakthrough therapy designations. Additional factors included attractively low valuations at beginning of 2025 and advances in gene editing, RNA therapies, and AI-enhanced drug discovery. Dynamic biotech performance helped explain strength of small-cap growth in 2025. |
FDA Gene Editing RNA Therapies Drug Discovery | |
EarningsSmaller companies generally fared better in terms of earnings growth in 3Q25 with many beating estimates. Research forecasts accelerated earnings growth for small-cap stocks in 2026, with estimated earnings growth expected to be higher than large-cap. Manager subscribes to adage that earnings run markets in the long run. |
Growth Estimates Outperformance | |
| 2025 Q3 |
InfrastructureThe Fund is maintaining investment emphasis on infrastructure themes, particularly AI data centers and reindustrialization in the U.S. This encompasses both Industrials and Energy sectors, with infrastructure being a key investment focus area for the portfolio. |
Infrastructure Spending Data Centers Construction Industrial Services |
AIAI represents a significant investment theme with exposure to companies providing picks and shovels for AI and mega-cap companies' CapEx needs across several industries. The portfolio includes companies involved in AI data centers and power generation for AI infrastructure. |
AI Data Centers Semiconductors Power Equipment | |
SemiconductorsMuch of the portfolio's technology exposure is concentrated in semiconductors and semiconductor capital equipment names. The semiconductor sector contributed significantly to quarterly performance and remains a core technology focus. |
Semiconductors Semi Equipment Memory Chip Designers | |
DefenseAerospace & defense was the top contributing industry for both quarterly and year-to-date performance. The portfolio maintains meaningful exposure to defense companies including Kratos Defense & Security Solutions and AAR Corp. |
Defense Aerospace Defense Electronics Defense Components | |
OnshoringReindustrialization in the U.S. is a key investment emphasis, reflecting the broader onshoring trend. This theme encompasses multiple sectors including Industrials and Energy as companies bring manufacturing back to domestic markets. |
Onshoring Industrial Policy Construction Manufacturing | |
| 2025 Q2 |
Small CapsSmall-cap stocks showed resilience in 2Q25 with Russell 2000 gaining 8.5% after a volatile first quarter. Small-caps remain attractively valued relative to large-caps, trading near 25-year lows on EV/EBIT basis. Historical patterns suggest small-cap value may outperform growth in sustained recoveries. |
Russell 2000 Valuation Recovery Bear Market Relative Performance |
ResilienceBoth U.S. stocks and the economy demonstrated remarkable resilience during challenging conditions in 2025. Despite volatility and uncertainty, markets recovered strongly in the second quarter, with investors learning to expect the unexpected from policy changes. |
Market Recovery Economic Strength Volatility Adaptation | |
ValueSmall-cap value stocks are positioned favorably with attractive relative valuations near 25-year lows versus large-caps. Historical analysis shows value typically outperforms growth in sustained recoveries after bear markets, with four out of five previous one-year recovery periods favoring value. |
Relative Valuation EV/EBIT Historical Performance Recovery Patterns | |
VolatilityVolatility has been a defining characteristic of 2025, with significant spikes following policy events like Liberation Day. The VIX showed anomalously calm periods in May and June, though volatility is expected to increase with upcoming tariff expirations and policy uncertainty. |
VIX Policy Uncertainty Tariffs Market Stress | |
| 2025 Q1 |
Small CapsSmall-cap Russell 2000 Index fell -9.5% in Q1 2025 versus -4.5% for large-cap Russell 1000. Manager sees high potential for sustained period of small-cap leadership based on attractive valuations. Russell 2000 remains far more attractively valued than Russell 1000 on EV/EBIT basis. |
Russell 2000 Valuation Leadership Outperformance Recovery |
ValueRussell 2000 Value Index held value better than Growth Index, down -7.7% versus -11.1% in Q1 2025. Value index lost far less from previous small-cap peak, down -7.6% versus -19.7% for Growth. Manager emphasizes hunting for attractive stock prices in quality companies during downturns. |
Russell 2000 Value Defensive Quality Downside Protection | |
VolatilityFirst quarter offered more uncertainty than usual with tariff talk, stubborn inflation, declining consumer confidence, and recession worries. Manager notes corrections tend to occur more frequently in small-cap space and staying invested during downturns is crucial for long-term success. |
Uncertainty Corrections Market Timing Downturns | |
| 2024 Q4 |
EnergyEnergy sector was a top performer with 14.95% quarterly returns and 29.40% annual returns. The fund increased domestic energy exposure, particularly in natural gas and power generation companies. Energy equipment & services was the top contributing industry for both quarterly and annual periods. |
Natural Gas Power Generation Energy Equipment Oil Services Midstream |
Infrastructure SpendingThe fund holds several companies benefiting from increased government and private sector spending on U.S. infrastructure maintenance and growth. Construction & engineering was the top contributing industry annually, driven by ongoing infrastructure investment needs. |
Construction Engineering Government Spending Infrastructure Public Works | |
OnshoringThe fund is positioned to benefit from the ongoing need to re-shore manufacturing across several industries and boost U.S. chip-making capabilities. This trend is expected to drive multi-year growth for portfolio companies. |
Manufacturing Reshoring Semiconductors Domestic Production Supply Chain | |
| 2024 Q3 |
Small CapsSmall-caps rebounded strongly in Q3 2024 with the Russell 2000 gaining 9.3%, outpacing large-caps. The manager believes small-caps face a long road back to market leadership but sees a confluence of factors supporting sustained outperformance. Historical data shows strong subsequent returns following double-digit monthly gains and Fed rate cuts. |
Russell 2000 Outperformance Market Leadership Relative Valuations |
ValueSmall-cap value significantly outperformed growth in Q3 with the Russell 2000 Value Index up 10.2% versus 8.4% for growth. The strength came disproportionately from Financials, particularly banks. The manager expects the growing economy to continue helping value stocks in coming months. |
Russell 2000 Value Banks Financials Outperformance | |
RatesThe Fed enacted a 50 basis point rate cut in mid-September with signals of potential second reduction before year-end. Historical analysis shows small-caps have performed well following previous Fed rate cuts, averaging double-digit returns in 3-, 6-, and 12-month periods after initial cuts. |
Fed Rate Cuts Interest Rates Monetary Policy Historical Performance |
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