article , video 02-23-2016

Four Reversals in the Market

Co-CIO Francis Gannon talks about the significance of four clear reversals in the market that have occurred within the past six months. How will the changing environment impact active investors? 

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4 Reversals in the Market

There have been four clear reversals in the market really over the past six months which I think are pretty substantial.

Shift from high-return to low-return environment

The first is the fact that we've gone from a high-return environment to a low-return environment. If you look at the five-year annualized return of the Russell 2000 at the end of June of last year, it was north of 17 percent. That same number at the end of December would have been below 10 percent. Not surprising given the correction we saw in the latter part of last year.

Value is now ahead of growth

The second reversal has been that we've gone from an environment where growth has dominated to one where we think value has dominated. And it's really been clearly seen in the fact that you've been in an environment where growth has outperformed value in the Russell 2000 over five out of the past six years.

But in the down market cycle that we saw in the latter part of last year, that has continued into this year and in 2016, the value has clearly outperformed and we think that's significant on a variety of different levels, especially for active managers like ourselves.

Earners are beginning to outperform non-earners

The third reversal that you've seen in the market this year is you've gone from a period of time where earners have underperformed and non-earners have outperformed.

This reversal started in July of last year. And it was really led by biotechnology. The peaking of biotech and the rollover in biotech has really continued again into the market this year. So we think that's pretty significant.

Over-levered companies are beginning to underperform

And the last reversal we've seen in the market has been the fact that access to capital is getting increasingly more difficult for companies. So those companies that have over-levered balance sheets are starting to underperform in the overall market.

And once again, we think this is extremely important as we think about our world and the fact that real businesses that don't necessarily need access to the capital markets that have real earnings are where the market is gravitating to in what has been a very difficult environment for the market, at least so far this year.

Important Disclosure Information

The thoughts and opinions expressed in the video are solely those of the persons speaking as of January 26, 2016 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.

Smaller-cap stocks may involve considerably more risk than larger-cap stocks. (Please see "Primary Risks for Fund Investors" in the prospectus.) The 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. 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.

Distributor: Royce Fund Services, Inc.

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