Q2 2026 Fund Commentary

Commentary and opinions are provided by Royce & Associates, LP, Franklin Advisers, Inc., and Franklin Templeton Investments Corp..

Market commentary

Global equities rose sharply during the second quarter of 2026, sustaining positive momentum amid healthy macroeconomic and corporate fundamentals. Small- and micro-capitalization stocks continued to lead the U.S. equity market in a strong period for equities of all sizes and styles.

Results for non-U.S. stocks decoupled from the pattern of their stateside peers, with non-U.S. small-caps trailing non-U.S. large-caps. By investment style, U.S. growth investing surpassed value in each cap segment. After beating its growth counterpart for three straight quarters, small-cap value trailed in the second quarter, buoyed in large part by greater growth-side exposure to artificial intelligence (AI) related companies.

Performance

An underweight allocation to the energy sector contributed to performance because of falling oil prices. A lack of exposure to the utilities sector also contributed because of lower energy prices. Selection within the materials sector contributed amid commodity weakness.

Kulicke & Soffa Industries Inc., Insperity Inc. and Dexerials Corp. contributed to performance.

Selection among information technology stocks and an underweight allocation to the information technology sector detracted from performance during a volatile period for technology companies. An overweight allocation to the consumer staples sector also detracted, as did selection among health care and real estate stocks.

Academy Sports and Outdoors Inc., Hackett Group Inc. and Vontier Corp. detracted from performance.

Portfolio activity

The sub-advisor added Cooper Companies Inc., Yesway Inc., Natural Grocers by Vitamin Cottage Inc., Sprouts Farmers Market Inc., BrightView Holdings Inc. and Central Bancompany Inc.

Avantor Inc., Central Garden & Pet Co., Douglas Dynamics Inc., Inter Parfums Inc., Quaker Houghton and Academy Sports and Outdoors Inc. were increased.

The sub-advisor sold Kimberly-Clark de México, S.A.B. de C.V.

The sub-advisor reduced Brightstar Lottery PLC, J & J Snack Foods Corp., Telephone and Data Systems Inc., Kulicke & Soffa Industries Inc., TowneBank and Pason Systems Inc.

Outlook

In the sub-advisor's view, investor appetite for the AI trade has concentrated equity index composition and caused some frothiness in technology stocks, although this appears to be contained. The broader equity market, notably in the U.S., is supported by strong earnings and a resilient macroeconomic backdrop, while beneficiaries of AI capital expenditure continue to justify ambitious earnings growth expectations.

Falling energy prices are helpful for inflation expectations, but core inflation remains persistently high in many regions, prompting a hawkish tilt to monetary policy in most developed economies, even those with weaker macroeconomic backdrops such as the eurozone. In the sub-advisor's view, this is creating a challenge for risk assets but is largely outweighed by strong corporate fundamentals. Trailing earnings growth is so far doing little to dampen forward earnings expectations, particularly in the U.S.

The sub-advisor believes ambitious earnings expectations for small-cap stocks could be revised down, although the domestic U.S. market remains broadly insulated from Middle East tensions. Higher interest rates may disproportionately affect smaller businesses.