2017 Outlook Masterclass: What's Next for Small-Caps?
article 01-10-2017 2017 Outlook Masterclass: What's Next for Small-Caps?

Co-CIO Francis Gannon joins's 2017 Outlook Masterclass to discuss the opportunities for active management and small-caps.


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"The most significant thing from our perspective in our asset class, which is small-caps, was the significant bear market we had that bottomed in February of this year. We had over 26% correction in the Russell 2000 and not many people are talking about it. And then you've had this incredible stealth bull market, if you will. The Russell 2000 is up over 45% from its low. And so it's been a powerful surge to the upside. But that critical from our perspective as a value investor, that down market really enabled us to set up our performance, not just for the remainder of this year, but what we think will be a very interesting 2017 as well."

Co-CIO Francis Gannon joined's 2017 Outlook Masterclass on December 8 to discuss the important events of 2016, and what's next for 2017.

Francis discussed the importance of fundamentals, telling host Gillian Kemmerer, "I think it's staying true to your discipline in terms of how you look at a company, not just from a short term perspective but from a long term perspective. It's staying true to your discipline in terms of how you value those companies and your due diligence process along the way. And what we found was the most interesting opportunities in a world, in our world; we're in the most cyclical areas of the market, that for all intents and purposes, safety was overpriced. And I think we have lived in a world over the past several years where people have overpriced safety, be it bonds or utilities or REITs at various periods of time. And they forgot about the power of compounding, which is something that, I think we as investors try to find, these great businesses that we can own for long periods of time and benefit from the power of compounding. And that has not been in investors' kind of mindset for a long period of time. They have been worried about downside protection. You can still achieve downside protection and still participate in the overall market. And I think that's what investors are going to wake up to over the next several years."

As to the prospects for active management and value-led markets, Francis said, "The growth to value shift is significant now, and it’s one that we think is going to continue to play out over the next several years. So this rotation from growth to value we think has a long way to go. If value continues to do well, what you're going to see in the market is active management come back with a vengeance. I think that is going to be one of the takeaways I think of this new shift that we’re seeing in the overall market is the return of active management should be a major theme for investors going forward."

Closing the segment, Francis summed up his thoughts for what's next for small-caps, saying: "I think 2016 represents an inflection point in a variety of different markets. In the small-cap market from our perspective, it was that transition from growth to value. So I think from our perspective, focus on value within the small-cap space. We are living in a world now where fundamentals matter once again. We think small-caps should be positioned quite well in an environment where you see value particularly do well. So I think from our perspective in the small-cap space to stay active, find great businesses, and own those great businesses for the next three to five years, and I think the outcome is going to be quite exciting."

Watch's 2017 Outlook Masterclass here.

Important Disclosure Information

The thoughts and opinions expressed in the video are solely those of the persons speaking as of December 8, 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.

Although dollar cost averaging can be a beneficial method for long-term investing, it does not guarantee a profit or protect from loss in a declining market. All investing involves risk, including the possible loss of principal, and there can be no guarantee that any investing strategy will be successful.

Investments in securities of small-cap companies may involve considerably more risk than investments in securities of larger-cap companies. (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.

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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