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QTD Small Cap – 2Q2026 vs. R2000

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Market Observations & Portfolio Commentary 

Small Cap – 2Q2026 vs. Russell 2000

 

Market Update 

 

U.S. equities staged a reversal in Q2, with the Russell 3000 Index gaining 15.4% and the S&P 500 posting its strongest quarter since 2020. The rally was fueled by AI infrastructure spending and an earnings season that beat expectations, overcoming early-quarter anxiety over the Middle East conflict. Momentum built in late June after the U.S.-Iran peace deal eased oil prices and gave rates room to retreat. Headwinds included a hawkish shift in Fed expectations toward a hike, and a reversal in Energy after a solid start to the year. The quarter reflected optimism around AI and earnings colliding with an uncertain rate outlook.

Equity leadership shifted beneath the headline rally. Technology, the weakest sector to start the year, surged to lead the market as the only sector to outperform the S&P 500, driven by a historic rebound in semiconductors. Energy was the worst performer as oil prices retreated, while defensive sectors, including Utilities and Consumer Staples, also declined. Small caps outpaced large caps despite AI-driven leadership at the top. Momentum and Volatility factors led, Value and Growth were mixed, and Quality and Yield, areas our portfolios tilt toward, were headwinds.

 

Key Performance Takeaways

  • The London Company Small Cap portfolio increased 12.9% (12.6% net) during the quarter vs. a 21.5% increase in the Russell 2000 Index. Underperformance was driven by stock selection, partially offset by sector exposure.

  • The Small Cap portfolio produced strong absolute returns in Q2 but fell short of our 85–90% upside capture expectations. Strength was concentrated in high-beta and high-volatility names. The top beta quintile returned nearly 58% and drove the majority of the index’s gain, and our lack of exposure to this cohort accounted for nearly 80% of the relative underperformance. Further, down the market cap spectrum, just 25% of profitable small & mid cap companies beat the Russell 2500 in Q2, a reminder that this rally rewarded momentum over fundamentals. Relative performance improved sharply in June as participation began to widen. We remain confident that our focus on durable, high-quality businesses positions the portfolio to compound attractively over full cycles.

 

Top 3 Contributors to Relative Performance 

  • Qualys, Inc. (QLYS) – QLYS was a top contributor as investor sentiment improved across the cybersecurity sector. While concerns around AI disruption weighed on the group earlier this year, AI is increasingly viewed as strengthening demand for cybersecurity solutions. We continue to view QLYS as a high-quality business with a durable competitive position, supported by its expanding platform and strong product strategy.

  • CTS Corporation (CTS) – CTS outperformed following strong quarterly results, supported by improving demand across its diversified industrial and transportation end markets. Management continues to execute well on operational initiatives while benefiting from a more favorable demand backdrop. We remain attracted to CTS’s disciplined capital allocation, margin expansion opportunities, and ability to compound earnings over time.

  • Landstar System, Inc. (LSTR) – LSTR benefited from improving sentiment that freight conditions are beginning to stabilize following a prolonged downturn. Earnings reflected stronger pricing, disciplined cost management, and the resilience of its asset-light business model. We continue to like LSTR’s flexible operating model, strong cash generation, and ability to benefit as freight markets recover.

 

Top 3 Detractors from Relative Performance 

  • White Mountains Insurance Group Ltd (WTM) – WTM lagged during an otherwise uneventful quarter following strong prior-period performance driven by the Bamboo transaction. The shares also benefited less from the broader market rebound after proving relatively defensive earlier in the year. We remain confident in management’s disciplined capital allocation and ability to compound book value per share over the long term.

  • Vontier Corp (VNT) – VNT declined as temporary margin pressure from business mix and higher investment spending overshadowed otherwise solid operating results. We expect several of these headwinds to normalize while the core convenience retail business continues to benefit from industry consolidation, modernization, and digitalization. We remain confident in VNT’s durable franchises and long-term growth opportunities.

  • CCC Intelligent Solutions Holdings Inc. (CCC) – CCC detracted as investor concerns around AI disruption continued to pressure the shares. We believe these concerns overlook CCC’s deeply embedded platform, proprietary data, and mission-critical role within insurance workflows. Management’s conviction is reinforced by meaningful insider buying and an accelerated share repurchase program.

 

Sector Influence

We are bottom-up stock pickers, but sector exposures influenced relative performance as follows:

  • What Helped: Underweight Energy & Utilities (two weaker performing sectors)

  • What Hurt: Overweight Consumer Staples & Materials (weaker performing sectors)

 

Trades During the Quarter

  • Reduced: Matson, Inc. (MATX) – We trimmed MATX on recent strength to reduce its relative weight following meaningful appreciation within the portfolio. The Transpacific market remains stable, the U.S. consumer is holding up, and MATX continues to generate substantial cash and reduce its share count.

  • Reduced: Murphy USA, Inc (MUSA) – We trimmed MUSA after the stock rallied on fuel margin strength, which is inherently cyclical and difficult to sustain at current levels. The core thesis and our long-term conviction remain intact, and we redeployed proceeds into additional opportunities within the portfolio.

  • Initiated: McGrath RentCorp (MGRC) – MGRC is a leading business-to-business specialty rental company operating across modular buildings, portable storage, and electronic test equipment. It serves commercial, education, healthcare, and data center customers through a primarily recurring rental model. Education represents roughly one-third of revenue and provides stable, longer-duration leases funded through state and local bond measures. MGRC has organically grown market share from approximately 4% to 14%, generates returns on invested capital above 20%, and maintains a conservatively financed balance sheet that supports organic growth, tuck-in acquisitions, and capital return. Regional scale advantages — including deep fleet availability, internal maintenance capabilities, and regulatory expertise — allow MGRC to compete effectively on complex, higher-value projects where reliability and timely installation are more important than being the lowest-cost provider. An eventual recovery in commercial construction would provide additional upside through higher utilization and operating leverage. We believe the market underappreciates MGRC’s resilient cash flow profile, internally driven growth opportunities, and long-term earnings power.

 

Looking Ahead

Our outlook remains broadly constructive, supported by a healthy earnings backdrop, resilient economic data, and the prospect of meaningful long-term productivity gains from artificial intelligence. That said, headwinds facing today’s market leadership are accumulating in ways we believe matter. The AI capex boom is real but increasingly fragile, as free cash flow at several hyperscalers has turned negative even as their share prices continue to compound. Geopolitical and tariff conditions remain fluid, and further Fed rate cuts may prove difficult against stubbornly sticky inflation, low unemployment, and resilient economic activity. Layered on top of historic index concentration and valuations requiring near-flawless execution, the cumulative case for discipline is hard to ignore.

From an equity market perspective, broadening at the large-cap index level has masked a narrower reality beneath the surface, with leadership rotating between concentrated energy and AI-related technology bets accompanied by significant speculation. Complicating this picture, June’s Russell reconstitution meaningfully reshuffled index composition across styles and down the cap spectrum, with semiconductor exposure in growth benchmarks rising from roughly twice that of value benchmarks to more than ten times over. With trillions benchmarked to these indices, investors who believe they hold a diversified mix of strategies may find their actual exposures have shifted considerably. History suggests periods of high-beta, lower-quality outperformance are prone to mean reversion, a dynamic that has often served as a tailwind to our approach. With valuations and earnings expectations elevated and dividend yields near multi-decade lows, we believe it is prudent to expect more modest equity returns ahead. Against this backdrop, our approach, anchored in quality, high active share, and sources of downside protection, can serve as important ballast and a valuable diversifier for portfolios going forward.

 

Annualized Returns 

As of 6/30/2026

Small Cap - 2Q2026 vs. R2000 Annualized Returns

Inception date: 9/30/1999. Performance is preliminary. Subject to change. Past performance should not be taken as a guarantee of future results. Net of fee returns are calculated net of an annual model management fee of 1.00%. Please see the disclosure notes found on the bottom of the page.

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Disclosure Notes

 

The London Company’s performances are size weighted and annualized based on calculations for the period ending June 30, 2026. The characteristics discussed herein relate to a representative account, and not every client’s account will have these exact characteristics. As London manages its client portfolios according to each client’s specific investment needs and circumstances, London cannot affirm that the characteristics of the account shown are similar to all accounts participating in the strategy. This is due in part to the timing of trades by the Advisor, market conditions, cash availability, and the timing of client deposits and withdrawals. Therefore, prospective clients should not assume that similar performance results to those shown would have been achieved for their accounts had they been invested in the strategy during the period. None of the information contained herein should be construed as an offer to buy or sell securities, or as investment recommendations.

 

Definition of Firm: The London Company of Virginia is a registered investment advisor. Registration does not imply a certain level of skill or training. More information about the advisor, including full descriptions of its investment strategies, fees and objectives, can be found in the firm’s Form ADV Part 2, which is available upon request by calling 804.775.0317 or visiting www.TLCadvisory.com. The London Company claims compliance with the Global Investment Performance Standards (GIPS®). GIPS® is a registered trademark of CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein. Please visit www.TLCadvisory.com or contact us at 804.775.0317 to request a complete list and description of The London Company’s composites and/or a GIPS® Report that adheres to the (GIPS®) standards.

 

Composite Creation/Inception Date: September 30, 1999

 

Composite Definition: The Small Cap strategy invests mainly in conservative, low-beta, small-cap equities with a focus on above-average downside protection. Primarily we seek profitable, financially stable small-cap companies that consistently generate free cash flow, high returns on unleveraged operating capital, trade at significant discounts to their intrinsic values, and are run by shareholder-oriented management. Positions are usually within the market capitalization range of the major, domestic small-cap indices. Accounts in this product composite are fully discretionary taxable and tax-exempt portfolios with a minimum of $100,000 in assets. The product is measured against the Russell 2000 Index and has a creation and inception date of September 30, 1999. There is no use of leverage, derivatives, or short positions. All actual fee-paying discretionary portfolios are included in one or more composites that have been managed for a full calendar quarter with limited restrictions and similar objectives. As of July 1, 2022 The London Company redefined the composites to exclude all dual contract relationship and any potentially bundled fee scenarios. This policy is not retroactive, but will continue to apply going forward.

 

Benchmark Description: Primary: Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. Russell 2000 is a subset of the Russell 3000 Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership. Secondary: Russell 2000 Value Index measures the performance of the small-cap segment of the U.S. equity universe. It includes those Russell 2000 Index companies with lower price-to-book ratios and lower forecasted growth values. Benchmark returns are not covered by the report of independent verifiers.

 

Performance and Fees: Gross of fee returns are calculated gross of management and custodian fees and net of transaction costs. Net of fee returns are calculated net of an annual model fee of 1.00% and transaction cost and gross of custodian and other fees. The 1.00% model London Company management fee applied is the highest tier of the current composite fee schedule. This fee is applied monthly to the gross return at 1/12th the annual rate, which is 0.0833% per month. Actual investment advisory fees incurred by clients may vary. Net of fee returns prior to January 1, 2009 are calculated net of actual London Company management fees and transaction costs and gross of custodian and other fees. Some of the accounts in this composite paid a bundled fee, which included custodian, consultant and management fees. In addition, the total percentage of non-fee paying accounts in the composite was 100% from inception through 2005, 19.4% in 2006, 4.1% in 2007, and 1.5% in 2008. Returns may be net of miscellaneous fund expenses. The gross figures do not reflect the deduction of investment advisory fees. Returns are calculated and stated in U.S. dollars. Prior to April 1, 2024 returns are calculated gross of withholding taxes on foreign dividends and interest. Starting April 1, 2024, performance is calculated net or gross of foreign withholding taxes on dividends and interest income dependent on custodian data. Dividends are reinvested. Policies for valuing investments, calculating performance, and preparing GIPS Reports are available upon request.

 

Past performance should not be taken as a guarantee of future results. The report is for informational purposes only. Data, while obtained from sources we believe to be reliable, cannot be guaranteed and all statistics are subject to change. The statements contained herein are solely based upon the opinions of The London Company and the data available at the time of publication of this report, and there is no assurance that any predicted results will actually occur. Information was obtained from third-party sources, which we believe to be reliable but are not guaranteed as to their accuracy or completeness. This report contains no recommendations to buy or sell any specific securities and should not be considered investment advice of any kind. An investment in a London Company strategy is subject to risks, including the loss of principal.  Referenced strategies may not be suitable for all investors. The appropriateness of a particular strategy will depend on individual circumstances and objectives. In making an investment decision, individuals should utilize other information sources and the advice of their investment advisor.

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