article , video 06-10-2014

Current Opportunities for Active Management

In the post-financial crisis period, there has been much debate over active versus passive strategies. Co-Chief Investment Officer Chris Clark and Chuck Royce discuss this topic, along with active management in the small-cap space, the characteristics of an actively managed portfolio versus those of an index-based portfolio, current small-cap opportunities, and the case for active management in today's environment.


Chris Clark: There's been much debate about active versus passive strategies, certainly in the post-financial crisis period. What do you think about the opportunities that are presented in each, and specifically, how does it affect us in the small-cap space?

Chuck Royce: Passive strategies work terrifically from the bottom because you're 100% invested. But we're now entering a different period. Active management always adds value in the long term, especially in the small-cap space. So I'm very optimistic about active management, especially in the small-cap space.

Chris: Talk a little bit about sort of comparing what we can create in an actively managed portfolio versus the characteristics of the benchmark in the small-cap space that a lot of people have used as a proxy for investing in small-cap stocks.

Chuck: The favorite proxy has been the ETF involving the Russell 2000. The Russell 2000 is made up of 2,000 companies, with a significant number of companies that aren't profit making at all. It's made up of many, many speculative areas that we are not investing in. Our abilities to create a smaller portfolio using risk aversion techniques is profound, and we believe that can create value in the short term, especially in a volatile market, but compounding value in the long term.

Chris: You know a corollary to this conversion about the Russell 2000 is valuation. People use, obviously, the Russell as a benchmark for valuation in the small-cap space. By that measure, small-cap stocks do not look inexpensive. What are we finding in terms of the opportunity set of ideas that's available to us?

Chuck: The wonderment of the small-cap space is its broadness. We can find very specific companies that give us the reasonable chance of compounding money at a decent rate from here.

Chris: Returning to the active/passive debate, passive strategies have garnered all the flows in the market of the expensive active managers. Is that something that's structural? Is that in place for forever or is there a way for active managers to sort of re-exert their importance in investor portfolios?

Chuck: I think active managers have to re-earn their stripes, and I'd like to think that's going on right now. And I think the whole passive mania is partly a fashion and partly a short-term phenomenon.

Important Disclosure Information

The thoughts and opinions expressed in the video are solely those of the persons peaking and may differ from those of other Royce investment professionals, or the firm as a whole. There can be no assurance with regard to future market movements.

Please read the prospectus carefully before investing or sending money. You may obtain a prospectus on our website by clicking here. The prospectus includes investment objectives, risks, fees, charges, expenses, and other information that you should read and carefully consider before investing. Investments in securities of small-cap stocks may involve considerably more risk than investments in securities of larger-cap companies. (Please see "Primary Risks for Fund Investors" in the prospectus.) Russell Investment Group is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Russell® is a trademark of Russell Investment Group. The Russell 2000 is an unmanaged, capitalization-weighted index of domestic small-cap stocks. It measures the performance of the 2,000 smallest publicly traded U.S. companies in the Russell 3000 index. The performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index.



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