article 12-04-2013

"A quick glance at current performance reveals something strange…"

A quick glance at current performance reveals something strange… The five-year average annualized results for many of our Funds and most major U.S. equity indexes look odd or wrong to me, almost absurd, and certainly counterintuitive. I believe an optimistic, healthy target for absolute long-term equity average annual returns should be low double digits… So how are five-year equity index average annual returns in the range of the high-teens to the mid-twenties?  Did we and others do something different or unusually smart to achieve these results?

Unfortunately, the answer is both simpler… and less flattering to our stock-picking acumen. They’re not just a consequence of the market’s recent strength but also, and more important, the result of dropping some unusually bad numbers from the fourth quarter of 2008.

To recap: The five-year average annual total return for the small-cap Russell 2000 Index as of September 30, 2013 was 11.1%… yet when we moved forward just two months to the end of November 2013, the five-year return for the Russell 2000 jumped to 21.0%. Most of the time, a five-year period would capture a variety of experiences, maybe a whole market cycle or two. But occasionally it does not and represents instead a distortion that should be ignored when evaluating performance… which is why we think it’s best to stick to long-term periods of 10 years or more.

Rolling returns are an excellent tool to examine mutual fund performance. It allows us to look at returns over multiple time periods and to gauge the experience of investors who enter the market at different points in time because… if the number looks too high, it probably is…

You can learn more about rolling returns by watching Gunjan explain the benefits or by reading our research piece, "Rolling Returns: A Better Way to Measure Performance."

For The Royce Funds’ one-, five-, 10-year, and/or since inception returns as of the most recent quarter-end period, please see our Prices and Performance page.

Important Disclosure Information

Chuck Royce is President, Co-Chief Investment Officer, and a portfolio manager of Royce & Associates, LLC, investment adviser for The Royce Funds. Mr. Royce’s thoughts in this piece are solely his own and may differ from those of other Royce investment professionals, or the firm as a whole. There can be no assurance that companies that currently pay a dividend will continue to do so in the future.

Investments in securities of small-cap companies may involve considerably more risk than investments in securities of larger-cap companies. (See “Primary Risks for Fund Investors” in the prospectus.) Please read the prospectus carefully before investing or sending money. 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 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.

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