ARISTOTLE CAPITAL BOSTON, LLC
Markets Review
U.S. small cap equities delivered a strong rebound during the second quarter of 2026, outperforming large cap stocks as investor sentiment improved amid resilient economic growth, easing geopolitical tensions, and broadening market participation. The Russell 2000 Index gained 21.49% during the quarter, marking its strongest quarterly return since 2020 and one of the best quarterly performances in its history. Healthy consumer spending, a stable labor market, and generally better than expected corporate earnings reinforced confidence in the economic outlook, while lower energy prices and reduced concerns surrounding Middle East tensions further supported expectations for moderating inflation and continued expansion. As optimism broadened beyond the largest technology companies, investors increasingly rotated into smaller companies poised to benefit from improving economic conditions, accelerating capital investment, and renewed capital markets activity.
Stylistically, growth stocks outperformed their value counterparts during the quarter, with the Russell 2000 Growth Index returning 25.71% versus 17.19% for the Russell 2000 Value Index. Performance was driven by AI-related beneficiaries, higher beta companies, and businesses with accelerating revenue growth. Technology was the standout sector, led by significant gains in semiconductors, semiconductor equipment, networking infrastructure, and other AI-enabling hardware, while Industrials benefited from strength in power infrastructure, electrical equipment, engineering, and manufacturing related businesses. Health Care also rebounded, led by biotechnology and life sciences. In contrast, Energy gave back a portion of its first quarter gains as oil prices declined, while traditionally defensive sectors, including Utilities, Consumer Staples, and Materials, lagged. More broadly, investors favored higher growth and economically sensitive companies over higher quality, dividend paying, and more defensive businesses, leaving slower growth retailers, banks, commercial services, and consumer staples among the quarter’s relative laggards. From a factor perspective, low leverage and low variability had strong payoffs, while low volatility and quality had negative payoffs.
At the sector level, almost all sectors paid off positively. The best performing sectors were Information Technology (+55.85%), Health Care (+24.54%), and Industrials (+24.02%) while the worst performing sectors were Energy (-10.06%), Utilities (+0.13%), and Materials (+2.58%).
Sources: CAPS Composite Hub, Russell Investments
Past performance is not indicative of future results. Returns are presented gross and net of investment advisory fees and include the reinvestment of all income. Gross returns will be reduced by fees and other expenses that may be incurred in the management of the account. Net returns are presented net of actual investment advisory fees and after the deduction of all trading expenses. Please see important disclosures at the end of this document.
Performance Review
For the second quarter of 2026, the Aristotle Small Cap Equity Composite posted a total return of 13.56% net of fees (13.75% gross of fees), underperforming the 21.49% total return of the Russell 2000 Index. Security selection detracted from performance, while allocation effect aided results. The largest detractors on a relative basis were security selection in the Information Technology (owning Everforth coupled with not owning Credo Technology or quantum computing stocks and non-earning SaaS companies) and Industrials sectors coupled with overweight allocations to Materials and Financials. This was partially offset by security selection and an underweight position in the Energy sector as well as positive security selection in Consumer Staples and an overweight position in Information Technology.
| Relative Contributors | Relative Detractors |
|---|---|
| MACOM Technology Solutions | Alamos Gold |
| Mercury Systems | Huron Consulting Group |
| Benchmark Electronics | Credo Technology (not owned in the portfolio) |
| Pursuit Attractions and Hospitality | Bloom Energy (not owned in the portfolio) |
| WillScot Holdings | Everforth |
CONTRIBUTORS
MACOM Technology Solutions (MTSI), is a designer and manufacturer of high performance semiconductor products. The stock benefitted from strong earnings results and forward guidance featuring continued strong revenue and profitability, driven by accelerating demand across data‑center, industrial/defense, and telecom end markets. We maintain our position, as we believe the company’s meaningful exposure to growing demand from Data Center and 5G end market applications along with the integration of recent acquisitions and domestic manufacturing footprint should continue to drive shareholder value.
Mercury Systems (MRCY), is a developer of mission critical computing, signal processing, software, and secure electronics technologies used in aerospace and defense applications. The stock was rewarded for the company’s successful acceleration of deliveries on several high priority defense programs, alongside continued progress on its restructuring initiatives and cost reduction efforts. We maintain our position as we believe Mercury Systems is emerging from a multi-year operational reset, with improving execution, expanding margins, and lower leverage. In addition, we believe the stock is trading at attractive valuations relative to its normalized earnings power given the strong underlying demand across its aerospace and defense end markets, which should continue to create shareholder value over time.
DETRACTORS
Alamos Gold (AGI), a Canadian gold producer focused on developing and operating high quality mines in North America, detracted from performance following a reduction in 2026 production guidance driven by operational challenges at its Young-Davidson mine, including seismic activity, lower mining rates, and higher costs. Weaker gold prices during the quarter also weighed on the shares. We believe these headwinds are temporary and continue to view the company favorably given the successful ramp up of the Island Gold District, a robust project pipeline, and attractive long term production growth.
Huron Consulting Group (HURN), is a provider of technology, data, and analytics solutions to Healthcare, Education, and corporate clients. The stock reported strong results and handily beat analyst expectations. Despite that, shares sold off amid market sentiment around AI potentially cannibalizing their business model which we believe is overly pessimistic. We maintain a position, as we believe the company may continue to benefit from durable demand, expanding margins, and secular growth tied to digital and regulatory complexity in their end markets over the long term.
Recent Portfolio Activity
| Buys/Acquisitions | Sells/Liquidations |
|---|---|
| IPG Photonics | Americold Realty Trust |
| UMB Financial | Byline Bancorp |
| Verra Mobility |
BUYS/ACQUISITIONS
IPG Photonics (IPGP), is a global leader in high power fiber laser technology, providing mission critical laser systems used in industrial manufacturing, semiconductor fabrication, electric vehicle production, and medical applications. The company benefits from a vertically integrated business model, strong intellectual property, and technological leadership that support durable competitive advantages. The stock is well positioned to benefit from a recovery in manufacturing activity and secular growth trends including factory automation, reshoring, electrification, semiconductor investment, and advanced manufacturing, supporting improving earnings growth and long term shareholder value.
UMB Financial (UMBF), is a regional bank with a diversified business model spanning commercial banking, institutional asset servicing, private wealth management, healthcare payments, and specialty financial services. Unlike many regional banks, UMB generates a meaningful portion of its revenue from fee based businesses, providing a more stable earnings profile and reducing reliance on net interest income. The company has consistently demonstrated disciplined underwriting, strong credit quality, and a conservative balance sheet, positioning it to perform across economic cycles. We believe UMB is well positioned to benefit from improving loan growth, expanding fee income, and continued market share gains, while its strong capital position and attractive returns on equity support long term earnings growth and shareholder value.
SELLS/LIQUIDATIONS
Americold Realty Trust (COLD), is a real estate investment trust focused on the ownership, operation, development, and acquisition of temperature controlled warehouses. The position was liquidated due to deteriorating fundamentals.
Byline Bancorp (BY), is a full service commercial bank offering a broad range of products and service to small and medium sized businesses, commercial real estate, and consumers. The position was sold as the stock appreciated and reached our valuation target, reducing the risk/reward opportunity. Proceeds were redeployed into what we view as more attractive investment opportunities.
Verra Mobility (VRRM), is a provider of automated enforcement, tolling, and parking technologies and solutions. We exited the position after the loss of a significant customer contract materially changed our investment thesis, reducing confidence in the company’s long term earnings and growth outlook. The proceeds were redeployed into higher conviction opportunities.
Outlook
We remain constructive on the long term outlook for U.S. small cap equities. Valuations continue to appear attractive, with the Russell 2000 trading near multi-decade lows relative to large caps, while earnings have begun to reaccelerate. Consensus estimates point to small cap earnings growth surpassing large cap growth by late 2026/early 2027. Incremental increase in M&A activity, improving domestic manufacturing trends supported by reshoring and infrastructure investment, and a more favorable regulatory and tariff backdrop should provide longer term tailwinds for the asset class. Near term, we remain cautious as geopolitical risks, including the Iran conflict and related inflationary spillovers, may contribute to elevated volatility. Separately, mid-term election uncertainty has historically been associated with increased market volatility but has often given way to more durable small cap recoveries following the election cycle.
Positioning
Our current positioning is a function of our bottom-up security selection process and our ability to identify what we view as attractive investment candidates, regardless of economic sector definitions. Overweight allocations in Information Technology and Materials are mostly a function of our underlying company specific views rather than any top-down predictions for each sector. Conversely, we continue to be underweight in Health Care as we do not hold Biotechnology companies as that industry has significant binary risk. We are also underweight in Real Estate, as the sector has elevated interest rate sensitivity, refinancing risk, and structural challenges in segments such as office and retail, combined with generally weaker balance sheets, leading us to seek what we consider to be more attractive reward to risk opportunities. Given our focus on long term business fundamentals, our patient investment approach and low portfolio turnover, the strategy’s positioning generally does not change significantly from quarter to quarter. However, we may take advantage of periods of volatility by adding selectively to certain companies when appropriate.
The opinions expressed herein are those of Aristotle Capital Boston, LLC (Aristotle Boston) and are subject to change without notice.
Past performance is not indicative of future results. The information provided in this report should not be considered financial advice or a recommendation to purchase or sell any particular security. There is no assurance that any securities discussed herein will remain in an account’s portfolio at the time you receive this report or that securities sold have not been repurchased. The securities discussed may not represent an account’s entire portfolio and, in the aggregate, may represent only a small percentage of an account’s portfolio holdings. The performance attribution presented is of a representative account from Aristotle Boston’s Small Cap Equity Composite. The representative account is a discretionary client account which was chosen to most closely reflect the investment style of the strategy. The criteria used for representative account selection is based on the account’s period of time under management and its similarity of holdings in relation to the strategy. It should not be assumed that any of the securities transactions, holdings or sectors discussed were or will be profitable, or that the investment recommendations or decisions Aristotle Boston makes in the future will be profitable or equal the performance of the securities discussed herein. Aristotle Boston reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. Recommendations made in the last 12 months are available upon request.
Returns are presented gross and net of investment advisory fees and include the reinvestment of all income. Gross returns will be reduced by fees and other expenses that may be incurred in the management of the account. Net returns are presented net of actual investment advisory fees and after the deduction of all trading expenses.
Effective January 1, 2022, the Aristotle Small Cap Equity Composite has been redefined to exclude accounts with meaningful industry-specific restrictions or substantial values-based screens hampering implementation of the small cap strategy.
All investments carry a certain degree of risk, including the possible loss of principal. Investments are also subject to political, market, currency and regulatory risks or economic developments. International investments involve special risks that may in particular cause a loss in principal, including currency fluctuation, lower liquidity, different accounting methods and economic and political systems, and higher transaction costs. These risks typically are greater in emerging markets. While Large-capitalization companies may have more stable prices than smaller, less established companies, they are still subject to equity securities risk. In addition, large-capitalization equity security prices may not rise as much as prices of equity securities of small-capitalization companies. Securities of small- and medium-sized companies tend to have a shorter history of operations, be more volatile and less liquid. Value stocks can perform differently from the market as a whole and other types of stocks. The material is provided for informational and/or educational purposes only and is not intended to be and should not be construed as investment, legal or tax advice and/or a legal opinion. Investors should consult their financial and tax adviser before making investments. The opinions referenced are as of the date of publication, may be modified due to changes in the market or economic conditions, and may not necessarily come to pass. Information and data presented has been developed internally and/or obtained from sources believed to be reliable. Aristotle Boston does not guarantee the accuracy, adequacy or completeness of such information.
Aristotle Capital Boston, LLC is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Aristotle Boston, including our investment strategies, fees and objectives, can be found in our Form ADV Part 2, which is available upon request. ACB-2607-3
Sources: CAPS Composite Hub, Russell Investments
Composite returns for periods ended June 30, 2026, are final.
*The Aristotle Small Cap Equity Composite has an inception date of November 1, 2006, at a predecessor firm. During this time, Jack McPherson and Dave Adams had primary responsibility for managing the strategy. Performance starting January 1, 2015, was achieved at Aristotle Boston.
**For the period November 2006 through December 2006.
Past performance is not indicative of future results. Performance results for periods greater than one year have been annualized.
Effective January 1, 2022, the Aristotle Small Cap Equity Composite has been redefined to exclude accounts with meaningful industry-specific restrictions or substantial values-based screens hampering implementation of the small cap strategy.
Returns are presented gross and net of investment advisory fees and include the reinvestment of all income. Gross returns will be reduced by fees and other expenses that may be incurred in the management of the account. Net returns are presented net of actual investment advisory fees and after the deduction of all trading expenses. Please see important disclosures enclosed within this document.
The Russell 2000® Index measures the performance of the small cap segment of the U.S. equity universe. The Russell 2000 Index is a subset of the Russell 3000® Index. It includes approximately 2,000 of the smallest securities based on a combination of their market capitalization and current index membership. The Russell 2000 Growth® Index measures the performance of the small cap companies located in the United States that also exhibit a growth probability. The Russell 2000 Value® Index measures the performance of the small cap companies located in the United States that also exhibit a value probability. The volatility (beta) of the composite may be greater or less than the benchmarks. It is not possible to invest directly in these indices.
