article 08-19-2014

"Our expertise is in smaller-company stock investing."

"Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it."

— Warren Buffett

Volatility returned to the markets in July as investors had much to digest. After hitting a new all-time high early in the month, the Russell 2000 Index fell more than 6%—the index's worst monthly showing since May 2012—as concerns about economic growth, fear of lackluster corporate earnings, and increased geopolitical risk drove the selling.

At the same time, the performance disparity between small-caps and large-caps continued to widen. In fact, at the end of July small-caps trailed their large-cap counterparts by almost 900 basis points year-to-date, declining 3.1% versus a gain of 5.5% for the S&P 500.

It is the worst start to a new year, seven months in, for the small-cap side of the small versus large contest since 1998, which, by the way, was one of the worst relative years on record for small-cap stocks.

To be sure, it has been an eventful few years for equities, the global economy, and geopolitics. Predicting what macro factors will next drive the markets has always been a favorite pastime for many strategists, fund managers, and market commentators. It is not ours. Our expertise is in smaller-company stock investing.

We typically have little, if anything, to say about the economy in general and even less to say about large-scale, macro trends. That being said, we are in the business of responding to opportunities as they are created and doing so with composure.

In today's interconnected world, where unpredictable events across the globe are being priced into the markets at lightning speed, one's ability to react is paramount to achieving consistent long-term results. Our discipline, which involves staying focused on our day-to-day responsibilities and reacting rationally to headlines, was built for just this type of environment.

Corrections can arrive at any time, yet we remain optimistic going forward given our bias toward high-quality companies with cyclical orientations—an area of the market still rich in opportunity.

Important Disclosure Information

Francis Gannon is Co-Chief Investment Officer and Managing Director of Royce & Associates, LLC, investment adviser for The Royce Funds. Mr. Gannon's thoughts and opinions expressed 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 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 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 S&P 500 is an index of U.S. large-cap stocks selected by Standard & Poor's based on market size, liquidity, and industry grouping, among other factors. The performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index.

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