article , video 10-27-2016

The Small-Cap Bull Market Has Legs

Chuck Royce discusses the small-cap market today and why he believes the transition from growth to value will continue. 

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Francis Gannon: We've had a really interesting year in the market so far. We completed a bear market in February, and we have gone on to what we've called a stealth bull market, really since the low in February of this year, with the market up some 30%. What are your thoughts on the market, the small-cap market today?

Chuck Royce: This is a really important point. We did have a major correction from June of last year through February, a big correction, 25% plus. This is one of the top ten corrections over the last 25-30 years.

I don't recall a single commentary in the major press about small-caps doing that poorly for that period of time. It certainly affected us. It affected our 2015 performance.

But there was a shift starting in the mid-year to from growth, which has been straight up for six years, to less emphasis on that. Biotechs had a bubble.

And certainly this year with a very strong emphasis in the first quarter the leadership has shifted to value. And this is the most important thing. So in addition to having probably a much longer run ahead of us, 30% is probably not going to be the extent of this bull market in small-caps. I think it will be closer to 80-100% before a new, a big correction, but value will lead the way.

Frank: So, going into the end of the year, there is a lot of noise in the market from the Fed and the election and things. How should an investor look at the remainder of 2016?

Chuck: The investor should stop reading the headlines because there will be nothing that will make a lot of sense in the very short term. We are going to fight about rate increases until the last second here and we're certainly fighting every single day of the week about the election.

Francis: One of the more interesting questions we are getting from investors these days is, can this transition to value continue? Growth had a fantastic performance in the third quarter. What are your thoughts on that? Can value continue to outperform?

Chuck: I absolutely believe this is a long multiyear phenomenon. History backs that up. What happened after the internet bubble? We had six, seven years of value outperformance. I think something very similar is happening. It's always going to be tug of war. It's never going to be straight line, but I think value is absolutely going to lead things.

Now, value is displayed in lots of different ways but predominantly this will not be a high growth market, and it will be a value type of market. Another reason is it is probably a lower return market. Lower return markets are good for value investors and good for active managers.

Important Disclosure Information

The thoughts and opinions expressed in the video are solely those of the persons speaking as of October 13, 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.)

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