Signs of a Market Rotating Back to Value
article , video 05-12-2016

Signs of a Market Rotating Back to Value

After a dramatic turnaround in performance in the first quarter, Royce's Co-CIOs, President Chris Clark and Managing Director Francis Gannon, discuss recent market dynamics and the strategic steps we've taken to enhance processes around our core investment discipline.


Francis Gannon: We're very pleased with our performance in the first quarter of 2016. It's the culmination of really two things. One is the work that we have been doing behind the scenes on the funds, in the products in a variety of different ways, and also with the market gravitating more towards our style of investing and we think we are really well-positioned for a continuation of that going forward.

We saw a dramatic turnaround in our performance in the first quarter of 2016 and the good part about it is it's starting to bleed into our one-year numbers and in several cases our three-year numbers as well. So we're pleased with the turnaround we have seen.

During the quarter we saw the market rotate away from many of the types of companies that had done so well during the previous years. So the market gravitated to companies that have real earnings, the market gravitated to companies that have low valuation and, most specifically, we saw the market really gravitate to value type businesses and we saw a switch in the market from growth to value, something we hadn't seen in five of the previous six years in the Russell 2000.

We think we're at the beginning of what is going to be a multi-quarter, in fact multi-year process in terms of value outperforming in the overall market. We have just gone through last year a two standard deviation event in terms of growth outperforming value and we think the market is just beginning to rotate back to value.

Value did outperform not only for the quarter but has actually outperformed over the past nine months during the corrective phase of the market and we think that it actually has long legs as the market rotates from non-earners to earners and focuses more on valuation in a way that it hasn't over the past several years.

Chris Clark: We are very excited about what we saw in the first quarter of 2016 and it's really a culmination of a lot of things, both related to market dynamics but importantly the things that we've been working on within Royce.

Going back 2-3 years, we began a very close evaluation of sort of all the things that we do at Royce and we set in place actually a quarterly process of evaluating strategic initiatives of the firm.

"We think we're at the beginning of what is going to be a multi-quarter, in fact multi-year, process in terms of value outperforming in the overall market."

So we began by rationalizing our fund line-up and really making sure that the products that we have fit where we believe they fit in terms of the solutions that clients need and appropriately that the teams associated with them were focused exclusively on those efforts, so that their work was being appropriately concentrated and focused in a core zone of expertise.

I believe by really concentrating the scope of work of our PMs in core zones of the market and the investment discipline to which they are best suited was clearly contributing to some of the positive effects that we saw in this turn in our performance.

We constantly look at our PM teams and how they're supported, both in terms of analytical resources and quantitative technological resources. Over the past couple of years we made very purposeful decisions to add analytical staffing to support our PMs in a range of activities.

We also are continuously exploring outside technological resources, quantitative resources, and generating some internally as well. So we use both internal and external applications, to give a variety of lenses for our portfolio managers on their portfolios.

Ours is a very active process. It's bottoms-up in its orientation (very fundamental) but when you construct a portfolio in that way, you end up with a bunch of aggregated risks, risks that might be expressed in a variety of ways in the individual research that we do on specific companies. So we've added also lots of tools that allow us to explore what the aggregated risks are in our portfolios from what is a very idiosyncratic investment process which we employ here.

This was obviously a big move that we experienced in the first quarter and importantly it's not because anything radical occurred here at Royce. We just enhanced some of our processes around a core discipline that we know that works over time and the market really adjusted very abruptly in the quarter but, as we have seen over time and in our experience, these adjustments take not just a quarter to play out; they take a year, two years-five years, so we believe we are in the early innings of a long runway for a return to normalization in capital markets activity.

Important Disclosure Information

Average Annual Total Returns as of 3/31/16 (%)
  Average Annual Total Returns(%)


Dividend Value 5.13 -1.72 6.17 6.71 8.28 05/03/04 1.14 1.14
Heritage 4.90 -2.96 3.58 5.30 12.29 12/27/95 1.01 1.01
Low-Priced Stock -0.64 -11.26 -3.90 1.89 9.78 12/15/93 1.29 1.25
Micro-Cap -1.08 -14.02 -2.51 2.52 10.54 12/31/91 1.50 1.50
Micro-Cap Opportunity -0.94 -20.79 3.83 N/A 9.55 08/31/10 1.39 1.25
Opportunity 2.08 -12.74 4.73 4.67 11.39 11/19/96 1.17 1.17
Pennsylvania Mutual 6.22 -6.99 4.92 4.87 12.99
N/A 0.93 0.93
Premier 4.41 -8.34 3.64 5.79 11.11 12/31/91 1.13 1.13
Small-Cap Leaders 5.25 -8.12 2.59 4.94 8.96 06/30/03 1.24 1.24
Small-Cap Value 9.38 -6.10 2.93 5.06 9.81 06/14/01 1.23 1.23
Smaller-Companies Growth -4.31 -10.16 4.83 3.86 10.79 06/14/01 1.33 1.25
Special Equity 5.63 -9.60 5.76 6.57 8.59 05/01/98 1.15 1.15
Special Equity Multi-Cap 6.16 -7.65 9.43 N/A 9.98 12/31/10 1.01 1.01
Total Return 5.17 -4.09 6.80 5.44 10.43 12/15/93 1.22 1.22
Russell 2000 -1.52 -9.76 7.20 5.26 N/A 12/29/78 0 0
Russell Microcap -5.43 -13.05 6.61 3.18 N/A 06/30/00 0 0

*Not Annualized

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. Shares redeemed within 30 days of purchase may be subject to a 1% redemption fee, payable to the Fund, which is not reflected in the performance shown above; if it were, performance would be lower. Current month-end performance may be higher or lower than performance quoted and may be obtained at Operating expenses reflect the Fund's total annual operating expenses for the Investment Class as of the Fund's most current prospectus and include management fees and other expenses.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 Investment Class of Royce Micro-Cap Opportunity and Smaller-Companies Growth Funds.

The thoughts and opinions expressed in the video are solely those of the person 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.)

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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