Baron Capital, an investment management company, released its Q2 2026 investor letter for the "Baron Small Cap Fund." Baron Small Cap Fund gained 12.57% (Institutional Shares) in the second quarter, trailing the Russell 2000 Growth Index's 25.71% return. A copy of the letter can be downloaded here. U.S. equities rebounded sharply after March's selloff related to the U.S.-Iran conflict, with AI infrastructure, semiconductors, and other technology stocks driving much of the market's gains.
Small caps also outperformed large caps, although performance remained concentrated in high-Beta and Momentum stocks, areas where the Fund has historically had less exposure. The Fund benefited from several AI-related and industrial holdings, but software and services stocks remained pressured by concerns that AI could disrupt their businesses. Looking ahead, management believes broader market participation, attractive small-cap valuations, improving industrial growth, and stronger earnings could support future returns despite continued uncertainty around oil prices, inflation, and interest rates.
In addition, please check the Fund's top five holdings to know its best picks in 2026. In its second-quarter 2026 investor letter, Baron Small Cap Fund highlighted Legence Corp. (NASDAQ:LGN). Legence Corp. (NASDAQ:LGN), an engineering and construction services provider that engages in the engineering, installation, and maintenance services for mission-critical systems in buildings, contributed 1.24% to the performance during the quarter.
On August 17, 2026, Legence Corp. (NASDAQ:LGN) closed at $70.04 per share. One-month return of Legence Corp. (NASDAQ:LGN) was -8.44% and YTD its shares gained 54.22%. Legence Corp. (NASDAQ:LGN) has a market capitalization of $7.57 billion.
Baron Small Cap Fund stated the following regarding Legence Corp. (NASDAQ:LGN) in its Q2 2026 investor letter: "Legence Corp. (NASDAQ:LGN) is a leading provider of engineering, installation, and maintenance services for mission-critical building systems, with a focus on complex heating, ventilation, air conditioning, process piping, and other mechanical, electrical, and plumbing systems. Shares rose during the quarter, driven by a combination of strong underlying business momentum and continued enthusiasm around AI and data center construction, which remains a significant tailwind for the business. Quarterly results highlighted accelerating growth, with both revenue and cash flow more than doubling compared to the prior year.
Additionally, the company's backlog reached a record high, providing excellent visibility for future growth." Legence Corp. (NASDAQ:LGN) is not on our list of the 40 Most Popular Stocks Among Hedge Funds. As per our database, 36 hedge fund portfolios held Legence Corp. (NASDAQ:LGN) at the end of the first quarter which was 40 in the previous quarter. While we acknowledge the potential of Legence Corp. (NASDAQ:LGN) as an investment, we believe certain AI stocks offer greater upside potential and carry less downside risk.
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