article , video 11-30-2015

How Does Market Volatility Usually Affect Investing in Small-Caps?

The post-Financial Crisis period has been an environment largely characterized by above-average returns with few meaningful corrections. Portfolio Manager Jay Kaplan talks about the importance of stock market volatility and the ways in which he attempts to manage risk by paying close attention to valuation and the expectations of Wall Street

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“Volatility is interesting. I have been at this for a long time. I have been managing small-cap assets for a while, and up until the last six years or so volatility was normal. We haven’t seen volatility in any meaningful way in the last half-a-dozen years.

"There have been three, four, five—I don’t know—quarters of down market since the financial crisis; really not very much at all. We have forgotten that stocks go down sometimes—they don’t always go straight up.

“So volatility can present opportunity for us on the one hand. We are always looking for new ideas, and when the markets are moving around and stocks move around we can add to, or frankly sell parts of, existing positions. It expands the pond of opportunities that we can fish in.

"We are looking for new ideas. Many won’t make it to the portfolios, but there are more things to look at when markets move around. So volatility can present opportunities and volatility actually can be our friend. 

“When markets are volatile, investing in stocks that have very high expectations—which I generally don’t do—and stocks that would have expectations like that would be biotech stocks in today’s environment, for example. When markets go down they get hit really hard, and we have seen some of that in this recent period. So there’s a lot of risk involved in that.

“If you take the opposite approach, the approach that I take, and you invest in companies where the world and the marketplace tend to have very low expectations of a company’s performance and they are valued that way, you have two ways you can win.

"If the low expectations are exceeded, the stock will go up because they have beaten the expectations and, in fact, if they beat those expectations, their multiples and valuations often go up. So you get two bites at the apple, two ways to win, and if you are not exactly right, hopefully the expectations are so low that you don’t’ get hurt too badly.”

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 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. Royce Total Return Fund invests primarily in small-cap stocks and Royce Dividend Value Fund invests primarily in small-cap and mid-cap stocks. Investments in securities of small- and mid-cap stocks may involve considerably more risk than investments in larger-cap stocks. (Please see "Primary Risks for Fund Investors" in the prospectus.) Each Fund's broadly diversified portfolio does not ensure a profit or guarantee against loss. Each Fund may invest up to 25% of its net assets in foreign securities (measured at the time of investment), which may involve political, economic, currency, and other risks not encountered in U.S. investments. (Please see "Investing in Foreign Securities" in the prospectus.)

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