article 10-20-2016

The Strong Small-Cap Rally Will Keep Rolling

In a recent Royce Funds webcast, small-cap pioneer Chuck Royce, Portfolio Manager Charlie Dreifus, Co-CIO Francis Gannon, and Senior Investment Strategist Steve Lipper discussed their outlook for small-cap stocks and offered their thoughts on what's driving the current rally, market leadership for value, and the prospects for active management.

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In a recent Royce Funds webcast, small-cap pioneer Chuck Royce, Portfolio Manager Charlie Dreifus, Co-CIO Francis Gannon, and Senior Investment Strategist Steve Lipper discussed their outlook for small-cap stocks and offered their thoughts on what's driving the current rally, market leadership for value, and the prospects for active management.

Steve Lipper explained that he sees further strength for the asset class: "We have had a bear market in small-cap stocks that they didn't have in large-cap. The depth of the decline, the breadth of the advance, and the lack of participation to date all seem to be reasons to be somewhat comfortable with further advances."

Chuck Royce then broke down the third quarter, calling it "certainly a strong one by any standard. There was a broadening of the types of stocks that did well. Regarding value, I am very convinced that we are going to have–and have already begun–a multi-year period where value will lead."

Picking up on this, Francis Gannon detailed why he believes we are in a new cycle this year within the small-cap space. "The market is changing," he says. "It's a significant change, and one in which value is going to outperform for a period of time."

Charlie Dreifus then linked this current cycle to The Royce Funds’ approach: "This quarter speaks to the risk-oriented approach that we have at Royce, and it speaks to actively managed quality portfolios because they are enduring."

As to where the firm is finding opportunities and what some of the risks might be, Chuck said that the normalization of rates is critical. "We are looking for the normalization of interest rates. This weird phenomenon of the last six years has distorted not only corporate activities, distorted the money market transactional activity, but has also distorted investor activity. It has distorted the ability for quality companies to perform the way they should, although that's been reversed recently."

Also touching on interest rates, Charlie offered, "If it's tied with an improving economy, we should all applaud Federal Reserve interest rate increases. It shows that we are not in a period of stagnation. We're getting out of this uncertainty. We should see a dissipation of hesitation."

Francis emphasized the importance of corporate execution in the currently challenging situation: "Many of our companies are becoming more accustomed to operating in an environment of anemic economic growth. Therefore, they are using the strength of their balance sheet to make acquisitions to do what they should be doing in an environment where it is difficult to find that topline growth to continue to endure."

Summarizing his thoughts on today's market, he added, "Fundamentals matter again, earnings matter again, and we think that’s significant in terms of how you’re positioning portfolios today."

Access the October 5 financial professional webcast here.

Important Disclosure Information

Mr. Royce’s, Mr. Lipper’s, Mr. Dreifus’s, and Mr. Gannon’s thoughts in this interview concerning the stock market are solely their own and, of course, there can be no assurance with regard to future market movements.

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 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.

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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