article , video 09-04-2014

How Quality Can Lead in the Small-Cap Market

While quantitative easing has allowed financially leveraged companies to improve their fiscal health over the past several years, Chuck Royce sees signs of small-cap leadership for quality moving forward. 

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Chris Clark: We obviously have a number of different strategies within the small-cap space. What zones in the market are we being most rewarded for our emphasis on?

Chuck Royce: The whole quality zone has underperformed the most in the prior three years, five years, and that zone did particularly well in the last six months. So I am very much thinking that that quality zone will lead in the next two or three years, and we hope to fully participate in that.

Chris: What do you think the drivers of that will be?

Chuck: It's easier to think about why the inferior company has done very well. It’s very simple. This monetary easing had a dramatic, accelerated, exaggerated effect on lower quality. It allowed these companies to improve their overall financial health. Those stocks tripled and quadrupled. The quality zone, which was very prepared for the financial crisis, did perfectly fine from any absolute standpoint but did not do as well as the inferior company. That’s all changed.

Starting about a year ago, once the 10-year bond had kind of started to look ahead, I believe there’s been a nice shift that we can point to in a very specific way where quality is performing better. We’re seeing that across the board.

Chris: Give us a global perspective. We obviously have a practice that invests in international smaller companies around the world.

Chuck: We are definitely finding stronger valuations abroad than we find here. That’s been true for some time and I think that will continue to be true. These companies typically pay dividends. They have the similar sort of quality bias that we look for. We are very thrilled with the opportunity abroad. We’re finding it both in Europe and in Asia.

Important Disclosure Information

The thoughts and opinions expressed in the video are solely those of the person speaking 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. There can be no assurance that companies that currently pay a dividend will continue to do so in the future.

This material is not authorized for distribution unless preceded or accompanied by a current prospectus. Please read the prospectus carefully before investing or sending money. Investments in securities of small-cap stocks may involve considerably more risk than investments in securities of larger-cap stocks. (Please see “Primary Risks for Fund Investors” in the prospectus.) Investments in foreign companies may be subject to different risks than investments in securities of U.S. companies, including adverse political, social, economic, or other developments that are unique to a particular country or region. (Please see "Investing in Foreign Securities" in the prospectus.)

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