article , video 04-21-2016

Does the Shift to Value Signal a Shift to Active Management?

CEO Chuck Royce and Co-CIO Francis Gannon discuss the first quarter, which saw a correction and a powerful rally, and the prospects for active management following the transitions from growth to value and non-earners to earners.

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Francis Gannon: So Chuck, it was an interesting start to the year; you saw a pretty severe correction in the market and a pretty powerful rally into the end of the quarter. What’s your view on the small-cap market today?

Chuck Royce: I think the first quarter is exactly as you described - it was sharp down and sharp up. I think that was an important bottom in the small-cap space. The markets for small-caps were down 26%, from the peak in June – that sort of feels right as an important bottom, so I think we have a long way to go.

Francis: We saw many transitions in the first quarter of the year – perhaps the most significant one is the market transitioning away from growth to value, which we have not seen in quite a long period of time. Do you think that transition to value is here to stay?

Chuck: It's a critical shift in how people are participating in the market. We had a bubble in some of the high growth areas, especially biotech. We had a bubble that peaked in the middle of last year, actually, in the third week in July. That bubble was a very real introspective moment where these stocks are now down substantially and I believe that was an important sort of indicator of this shift to everything else, the value sector, and I truly believe the value sector has a long way to go.

Francis: In addition to the transition from growth to value and non-earners to earners it seemed to me that during the quarter fundamentals mattered once again, something we also had not seen in a period of time – what are your thoughts on that?

Chuck: I think you're absolutely right that the game changed. The game changed as the market was coming down. People were questioning this type of speculative investing. They were beginning to go back to fundamentals, real companies, and the kind of values that we use in the process of selecting stocks. So we definitely sensed that. The stocks started to act better in the third quarter and they acted a lot better in the first quarter.

Francis: It seems to me that active management mattered more during this bear-market market cycle that we’ve just completed in the small-cap space, and passive management trailed in the overall market. Do you think we are transitioning away from passive, more to active?

Chuck: And I think you are raising a great point - that it took a bear market – it took a correction of significance for this to shift. I am completely convinced that this shift to value is simultaneously a shift to active managers.

Important Disclosure Information

The thoughts and opinions expressed in the video are solely those of the persons speaking as of April 12, 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.)

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

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 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 2000 Value and Growth indexes consist of the respective value and growth stocks within the Russell 2000 as determined by Russell Investments. The performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index.

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