article , video 08-27-2015

U.S. Small-Caps: A Look Forward and a Look Back

While we have recently witnessed extraordinary runs from certain sectors of the small-cap market, Portfolio Manager Bill Hench believes a rally for many stocks in the small-cap universe, especially those more closely tied to domestic GDP, is still in the offing.

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"In 2015, the market has given good returns in sectors like non-residential construction and some of the parts of technology, specifically some of the memory devices and some of the semiconductor devices. Housing has just started to turn around. Health Care has been a very good sector, specifically biotech. Overall, most stocks have not participated to the extent that people think that they have.

"When you look at the averages, they look to have had very good performance. But when you get down and look at sector by sector and name by name, there are still a lot of names that are providing great opportunity not just because of valuation, currently, but because of their prospects going forward.

"We think if GDP continues to do better going forward, if we see a reduction in energy prices that sticks, if we see currency situations that calm down and don't give us 20% moves in a quarter, things should be pretty good for the U.S. economy.

"With a small-cap and micro-cap product like ours, it relies more on the domestic economy than it does on a global economy. If we want to take advantage of that, we think that the sectors that we're involved in—technology, industrial, consumer—should really lead going forward.

"Specifically, on a name-by-name basis, what we try to do is get the most bang for the buck in situations like this. Traditionally our companies do well when you've got good GDP growth, and we think if you look at the first quarter, which was lackluster and ugly and had a lot of currency noise in it as well as energy disruptions, if that corrects itself going forward, and you see more steady, reliable growth in the U.S., our portfolio should react positively to that.

"In the last six months we've found a host of different opportunities. There has been a number of what we call broken IPOs, or interrupted earnings stories, where stocks have come down dramatically from their IPO price yet still offer very good fundamentals, especially on their balance sheet and their ability to turn themselves around and start growing at superior levels again.

"We've also continued to nibble at some consumer names as well as some residential names. Financials have been a good returning group for us, but we've pulled back a little bit there as they've done very well over the last six months."

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.

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 micro-cap and small-cap companies may involve considerably more risk than investments in securities of larger-cap companies (see “Primary Risks for Fund Investors” in the respective prospectus).

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