Tech and Small Value Are This Year’s Odd Couple

The mutual fund tables are a little funny this year. Technology funds are near the top. That’s no surprise given all the excitement about artificial intelligence. But right there with technology are small-value funds. It’s rare to see these two Morningstar Categories moving together.

Fidelity Select Technology FSPTX was up 36.8% for the year to date through Aug. 31, 2026, and BlackRock Technology Opportunities BGSAX was up 30.8%. But right behind them were big gains from deep-value Hotchkis & Wiley Small Cap Value HWSIX (28.7%), Royce Small-Cap Special Equity RYSEX (27.7%), Harbor Small Cap Value HASCX (27.2%), and Diamond Hill Small Cap DHSCX (26.6%).

Tech usually rallies when the market is focused on growth and innovation, while small value tends to be in favor when investors rotate away from pricey stocks or if economic growth exceeds expectations.

But AI actually explains part of the rally. Data centers that power AI need energy—a lot of it. And small-value funds have plenty of energy companies and utilities companies. They also own some small semiconductor stocks that are on fire, though some small-value funds are selling those chip stocks as their prices and valuations soar.

I chatted with Charlie Dreifus, the longtime manager of Royce Small-Cap Special Equity. His fund did make a bundle with Vishay Intertechnology VSH, a semiconductor maker. (The fund later trimmed most of its position.) However, most of the fund’s big wins have been outside of tech and energy.

Many small-value portfolios fit the HALO theme (shoutout to Ritholtz Wealth Management’s Josh Brown), which stands for heavy assets, low obsolescence. The idea is to find capital-intensive companies with large physical structures that generally don’t look like chum for AI—think energy producers and large machines. There are slews of little, overlooked companies like that.

There’s also an undercurrent of contrarian moves available. Dreifus notes he added Manpower MAN and H&R Block HRB when value stocks were getting hit simply because money was moving from value stocks to tech stocks. “I knew these companies well, but the market was doubting them, so I bought both,” he said.

Although AI may be changing the landscape, niche firms that use a lot of software may have sufficient moats to overcome the incursions.

“Normally small caps do well when interest rates are declining, and we are coming out of recession,” Dreifus noted. “The stocks have been out of favor for so long that the market rotated into them given the low prices.

“No one has really paid much attention to the snapback in small value. This is very much Buffett/Graham. Buy the good companies that others are dumping. The price causes you to buy based on what you know.”

Hotchkis & Wiley Small Cap Value has won with energy names, plus tech value names like ad agency Stagwell STGW and electronics distributor Avnet AVT. The fund’s portfolio leans to the smaller, more value side of small value.

Harbor Small Cap Value’s portfolio almost entirely consists of three sectors: industrials, technology, and financials. While the big tech weighting has been the star, decidedly low-tech companies like Cheesecake Factory CAKE and Darling Ingredients DAR have also been big successes.

Diamond Hill Small Cap has very little in tech. Heavy asset names like aerospace and defense contractor Ducommun DCO and copper producer Trekor Metals TKO have boosted returns. But it has also had success with packaged-food firm Mama’s Creations MAMA.