Chuck Royce

Do you still think that we are past the point of substantial systemic risk in the financial system?

Yes. The policy decision to help banks in trouble was in my opinion an absolutely appropriate and intelligent choice, especially in light of the shock waves that Lehman's failure sent throughout the globe. Essentially, the Fed and Treasury promised that a similar collapse would not be permitted for the good of the global economy. I also feel very strongly that the creation of the public-private investment program based on an auction system for these troubled assets was the right move, one that should go some way in restoring confidence in the banking system. I expect the banking industry to keep stumbling a bit in the next few years, with a lot of consolidation and change. Again, I think perception is important in this case, and it's crucial that people see an industry that is doing its best to meet a formidable set of challenges. I think the Treasury's plan allows for that to take place. My thought is that this plan, along with the other efforts being made to engineer an economic recovery, should eventually have their desired effect.

Have you seen any signs in the last few months that the markets and the economy could be recovering?

As Whitney George recently pointed out on our website, we've seen more selling motivated by fundamentals than liquidity recently, which is a good sign for stocks. And, of course, the rally in March was definitely another positive development, if only from the standpoint of an improved perception of equities. I think the key remains stability: Both the markets and the economy must stabilize before any real—that is long-term and sustainable—recovery can take root. There are a few other slightly encouraging signs: Housing and auto sales seem to have bottomed out, and several retailers have reported numbers that, while not great, were far from the disasters that many seemed to be expecting.

Do you think that small-caps can lead the way out of the bear market, as they often have historically?

I am confident that small-caps should lead in the early phase of a sustained recovery for stocks. Stronger, more conservatively capitalized small companies have advantages, I think, in being more nimble than most of their larger cohorts and more stable than many of their smaller siblings. Each of these should help smaller companies to lead right out of the gate. I also believe that stocks will recognize the end of the recession first. The timing of this event remains elusive, but I feel confident the market will see a rebound coming.

Where have you been seeing opportunity in this market?

The opportunities have been both broad and deep, so we're seeing what we regard as extraordinary value all over the market. There are depressed areas, such as retail, where it's not clear what a return to normalcy might look like, but where several bargains were irresistibly compelling to us. There are other industries, such as healthcare and some specialized service businesses, that have done all right as businesses, but whose stock prices were badly beaten down, to the point where we were very happy buyers. In fact, I'm not sure that I have ever seen anything like the kind of opportunities this bear market has provided.

What is your take on the short-term rally in the first quarter?

Any rally is welcome in this difficult environment. However, it's important to remember that every bear market sees its share of short-term, bull-market bursts, so this kind of event is not surprising. The key issue is whether or not the market has reached a bottom, and on that score I'm very cautiously optimistic. My guess is that in the coming months, stocks will continue to bump along in a slowly positive direction. I expect that the market will continue to see high daily volatility, as we saw in the last few trading days of the first quarter. However, I also think that interim highs and lows will both creep incrementally higher, as confidence gradually returns to the markets. It's going to be a long, slow recovery, which makes sense considering the scope of the challenges that the market is working through.