article , video 12-15-2015

What Makes The Current Market Cycle Unique?

In some ways similar to the Internet bubble of the late ‘90s, the current market cycle has largely been driven by speculative growth. But unlike the dot-com collapse, the monetary stimulus policies over the past several years have, for a prolonged period of time, unintentionally disadvantaged the kinds of high-quality, financially sound companies that investors have historically favored after a steep decline.

TELL US
WHAT YOU
THINK

Francis Gannon: From a historical standpoint this has been a unique market, and we all know that every cycle is different. Have you seen cycles like this before in the overall market?

Chuck Royce: They are all different and they are all similar. I think there are aspects that are similar. Here the strongest parallel is the speculative growth activities that are going on today in the biotech world compared to the Internet part of the end of the ‘90s. It is very parallel. Value underperformed dramatically—we underperformed then, we have underperformed here—and then they tend to reach a peak. Maybe biotech has reached its peak. I would think so. It reached its peak I think in late June.

So we are looking forward to a different period coming up. There was a very strong period after the Internet bubble burst in the spring of 2000 and I am looking forward to a similar, better period for relative performance.

Francis: So one of the more interesting things about this cycle has been the fact that there really was no period of time where better-quality companies were able to take advantage of lower-quality companies, especially coming out of the great recession in ’09. That Darwinist moment didn’t occur. Why do you think it didn’t occur and then what do you think is going to happen going forward? 

Chuck: For policy reasons, we came to the conclusion that we must have a very stimulative monetary policy and we did that. And actually, it worked. We had asset inflation and we certainly had monetary inflation.

The companies that were most stressed were able to refinance. We have seen that in the junk bond market, we have seen it in the inferior company who went up five-fold, etc. Our companies, which tended to be much higher quality, were disadvantaged in their ability to somehow take advantage of that moment. 

Francis: We have heard anecdotal evidence for a lot of these zombie companies—companies that still need access to the capital markets—that that is changing. High yield are backing up and credit spreads are widening out that is, from our perspective, a positive. How do you think that is going to play out for many of those zombie-like businesses?

Chuck: Yes, I think that phase is over. We had a huge period—6+ years. Junk bonds are already backing up, so I think we are really entering in the next phase. The next five years will be completely different than the last five years. 

Average Annual Total Returns as of Quarter-End 9/30/15 (%)

  QTR YTD 1YR 3YR 5YR 10YR SINCE
INCEPT.
DATE
Dividend Value -10.22 -7.93 -5.83 7.41 8.32 7.29 7.76 05/03/04
European Small-Cap -3.04 8.13 -0.83 6.44 4.21 N/A 2.79 12/29/06
Global Financial Services -10.15 -3.66 0.39 13.97 11.94 6.95 7.56 12/31/03
Global Value -9.32 -2.37 -8.13 0.07 0.70 N/A 3.32 12/29/06
Heritage -10.43 -9.43 -6.05 6.27 6.36 6.56 12.06 12/27/95
International Micro-Cap -10.69 -4.04 -10.42 4.23 N/A N/A -0.14 12/31/10
International Premier -5.82 7.10 1.07 7.32 N/A N/A 3.82 12/31/10
International Small-Cap -9.38 -5.31 -11.39 1.15 1.52 N/A 3.41 06/30/08
Low-Priced Stock -15.65 -13.42 -14.90 -1.57 0.17 3.44 9.77 12/15/93
Micro-Cap -15.70 -16.86 -12.30 -0.94 1.46 3.99 10.63 12/31/91
Micro-Cap Opportunity -19.85 -16.40 -13.88 8.12 9.39 N/A 10.63 08/31/10
Opportunity -15.50 -14.93 -9.70 8.72 9.10 6.13 11.49 11/19/96
Pennsylvania Mutual -12.99 -12.92 -8.30 6.97 8.10 5.63 13.79 01/01/00
Premier -12.42 -10.95 -10.06 5.87 7.57 6.96 11.10 12/31/91
Small-Cap Leaders -13.66 -13.76 -10.80 4.73 5.68 6.02 8.58 06/30/03
Small-Cap Value -10.94 -10.03 -7.86 5.83 6.40 6.01 9.44 06/14/01
Smaller-Companies Growth -11.10 -3.16 3.42 10.38 9.67 6.09 11.26 06/14/01
Special Equity -11.35 -11.81 -4.23 5.91 8.72 7.37 8.55 05/01/98
Special Equity Multi-Cap -11.18 -13.97 -10.36 8.56 N/A N/A 9.41 12/31/10
Total Return -9.56 -8.89 -3.90 8.30 9.07 5.90 10.33 12/15/93
Russell 1000 -6.83 -5.24 -0.61 12.66 13.42 6.95 N/A N/A
Russell Microcap -13.78 -8.58 1.65 11.34 12.35 4.88 N/A N/A
Russell Glo x US SC -11.25 -4.38 -8.64 4.20 3.00 4.61 N/A N/A
Russell Global SC -11.57 -5.93 -4.90 6.65 5.95 5.15 N/A N/A
Russell 2500 Fnl Svc -3.68 -0.67 8.74 13.90 13.02 5.19 N/A N/A
Russell Euro SC -4.75 4.78 1.75 12.27 7.78 5.60 N/A N/A
Russell 2000 -11.92 -7.73 1.25 11.02 11.73 6.55 N/A N/A
Dividend Value Annual Operating Expenses: 1.55%
European Small-Cap Annual Operating Expenses: Gross 1.96% Net 1.54
Global Financial Services Annual Operating Expenses: Gross 1.93% Net 1.74
Global Value Annual Operating Expenses: Gross 1.65% Net 1.54
Heritage Annual Operating Expenses: 1.51%
International Micro-Cap Annual Operating Expenses: Gross 3.47% Net 1.65
International Premier Annual Operating Expenses: Gross 2.30% Net 1.54
International Small-Cap Annual Operating Expenses: Gross 1.84% Net 1.54
Low-Priced Stock Annual Operating Expenses: 1.47%
Micro-Cap Annual Operating Expenses: 1.48%
Micro-Cap Opportunity Annual Operating Expenses: Gross 1.56% Net 1.28
Opportunity Annual Operating Expenses: 1.15%
Pennsylvania Mutual Annual Operating Expenses: 0.92%
Premier Annual Operating Expenses: 1.10%
Small-Cap Leaders Annual Operating Expenses: Gross 1.52% Net 1.49
Small-Cap Value Annual Operating Expenses: 1.45%
Smaller-Companies Growth Annual Operating Expenses: 1.45%
Special Equity Annual Operating Expenses: 1.12%
Special Equity Multi-Cap Annual Operating Expenses: Gross 1.34% Net 1.24
Total Return Annual Operating Expenses: 1.19%

Important Performance and Expense Information

All performance information reflects past performance, is presented on a total return basis, reflects the reinvestment of distributions, and does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate, so that shares may be worth more or less than their original cost when redeemed. Investment and Service Class shares redeemed within 30 days of purchase may be subject to a 1% redemption fee payable to the Fund (2% for Royce International Micro-Cap, International Premier, and International Small-Cap Funds). Redemption fees are not reflected in the performance shown above; if such fees were reflected, performance would be lower. Current month-end performance may be higher or lower than performance quoted and may be obtained at www.roycefunds.com. All performance and expense information reflect results of the Fund’s Investment Class shares (Service Class for Royce Global Financial Services and International Micro-Cap Funds). Gross operating expenses reflect each Fund’s gross total annual operating expenses and include management fees, any 12b-1 distribution and service fees, other expenses, and any applicable acquired fund fees and expenses. Net operating expenses reflect contractual fee waivers and/or expense reimbursements exclusive of any applicable acquired fund fees and expenses. All expense information is reported as of the Fund’s most current prospectus. Royce & Associates has contractually agreed to waive fees and/or reimburse operating expenses through April 30, 2016 to the extent necessary to maintain net annual operating expenses (excluding brokerage commissions, taxes, interest, litigation expenses, acquired fund fees and expenses, and other expenses not borne in the ordinary course of business) to no more than 1.24% for the Service Class of Royce Micro-Cap Opportunity Fund; to no more than 1.24% for the Investment Class of Royce Small-Cap Value Fund; and to no more than 1.44% for the Investment Class of Royce International Premier and International Small-Cap Funds. Royce & Associates has contractually agreed to waive fees and/or reimburse operating expenses through April 30, 2025 to the extent necessary to maintain net annual operating expenses (excluding brokerage commissions, taxes, interest, litigation expenses, acquired fund fees and expenses, and other expenses not borne in the ordinary course of business) to no more than 1.99% for the Service Class of Royce Micro-Cap Opportunity Fund. Acquired fund fees and expenses reflect the estimated amount of the fees and expenses incurred indirectly by any applicable Fund through its investments in mutual funds, hedge funds, private equity funds, and other investment companies. All performance and risk information presented in this material prior to the commencement date of Investment Class shares on 9/14/07 for Royce Dividend Value Fund, 3/15/07 for Royce Heritage Low-Priced Stock, Small-Cap Leaders, Small-Cap Value, and Smaller-Companies Growth Funds, 3/1/12 for Royce Special Equity Multi-Cap Fund, and 1/22/14 for Royce International Premier and Royce International Small-Cap Funds reflect Service Class results. Service, Consultant, R, and K Class shares bear an annual distribution expense that is not borne by the Fund’s Investment Class.

Important Disclosure Information

The thoughts and opinions expressed in the video are solely those of the persons 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. The Royce Funds, other than Royce Special Equity Multi-Cap Fund, invest primarily in securities of micro-cap, small-cap, and/or mid-cap companies, which may involve considerably more risk than investments in securities of larger-cap companies (see “Primary Risks for Fund Investors” in the respective prospectus). The Funds may also invest to varying degrees in foreign securities which may involve political, economic, currency, and other risks not encountered in U.S. investments. Please read the prospectus carefully before investing or sending money. 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 Index is an unmanaged, capitalization-weighted index of domestic small-cap stocks that measures the performance of the 2,000 smallest publicly traded U.S. companies in the Russell 3000 Index. The Russell Microcap Index includes 1,000 of the smallest securities in the small-cap Russell 2000 Index. The Russell Global Small Cap Index is an unmanaged, capitalization-weighted index of global small-cap stocks. The Russell Global ex-U.S. Small Cap Index is an unmanaged, capitalization-weighted index of global small-cap stocks, excluding the United States. Index returns include net reinvested dividends and/or interest income. The Russell 1000 index is an unmanaged, capitalization-weighted index of domestic large-cap stocks. It measures the performance of the 1,000 largest 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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