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| Quarter | Letter Date | Fund Name | QTD | YTD | Tickers | Themes | Quick Take |
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"Conestoga's Micro Cap Composite returned 22.16% in 2Q26, trailing the benchmark's 28.98% gain driven by historically narrow, speculative AI-related leadership. Biotechnology holdings delivered exceptional performance, contributing over 600 basis points, while defense and industrial holdings also performed well."
The Conestoga Micro Cap Composite delivered a strong 22.16% net return in 2Q26, though it trailed the Russell Microcap Growth Index's exceptional 28.98% gain. Micro Cap Growth outperformed every major equity benchmark, reflecting improved investor sentiment toward smaller-cap stocks. However, benchmark strength was concentrated in a historically narrow group of high-beta, momentum-driven, and AI-related stocks, particularly in Technology which surged 82.8%. This speculative leadership proved challenging for the quality-focused portfolio. Health Care was the standout performer, with biotechnology holdings contributing over 600 basis points to returns, led by Twist Bioscience, Alpha Teknova, and Vericel. Industrials also performed well, with strong contributions from defense-related holdings. The manager does not expect speculative leadership to persist, noting that investor capital has crowded into narrow AI-related trades that history suggests typically normalize as supply constraints ease. The recent Russell Reconstitution reduced Small Cap AI exposure significantly. With the interest rate backdrop shifting toward potentially tighter policy, the manager believes companies with strong balance sheets, durable earnings growth, and high returns on capital will be better positioned to outperform as market leadership broadens.
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