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| Quarter | Letter Date | Fund Name | QTD | YTD | Tickers | Themes | Quick Take |
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Buyside Digest is not affiliated with, and does not endorse, Baron Small Cap Fund. This analysis is provided for institutional research purposes only and is not investment advice.
"Baron Small Cap Fund's Q2 2026 return of 12.57% trailed the Russell 2000 Growth Index due to underexposure to momentum and beta factors that dominated performance. Data center holdings including Vertiv and Legence surged on AI infrastructure demand while software names declined on AI disruption concerns."
Baron Small Cap Fund returned 12.57% in Q2 2026, trailing the Russell 2000 Growth Index's 25.71% return, primarily due to the Fund's structural underweight to high-beta and momentum factors which drove approximately 70% of underperformance. The AI secular growth trade dominated market returns, benefiting the Fund's data center holdings including Vertiv, Legence, and Cognex, though certain software holdings suffered on concerns about AI disruption. Small caps outperformed large caps for the quarter, extending year-to-date gains and remaining on track to outperform for the first time since 2016. The Fund added five new positions including restaurant franchisors Shake Shack and Wingstop, data center REIT Blackstone Digital Infrastructure Trust, and defense contractor Applied Aerospace & Defense. With 55 holdings and 39% of assets in companies owned for 10+ years, the manager believes the portfolio is well-positioned as market rotation favors overlooked sectors and the industrial economy strengthens after three years of subpar growth, though geopolitical uncertainty and AI-driven disruption require heightened diligence.
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