article 01-18-2017

Francis Gannon on CEFA Podcast: Why We See an Edge For Active Management

Co-CIO Francis Gannon tells the Closed-End Fund Association what the recent key shifts in the small-cap market mean for investors and why the closed-end structure is advantageous in the small-cap space.

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Co-CIO Francis Gannon joined the Closed-End Fund Association's (CEFA) podcast on January 12 to discuss the small-cap market.

Commenting on the important shifts within the small-cap space in 2016, Francis said, "From our perspective, the shift from growth to value, value continuing its outperformance is one of the big shifts you saw in the market last year, and we think it will continue. Obviously, the other two, one being that small cap stocks outperformed the large cap stocks for the first time in several years we think is significant.

The final one is you saw cyclicals actually outpace some of the more defensive areas of the markets last year, which we think is significant and has the opportunity to continue over the next several years."

On opportunities that look attractive in the small-cap space, he remarked, "I think many of the areas that we're continuing to find opportunity are more economically sensitive or cyclical in nature. For a long period of time, the market has, and you can argue continues to overprice safety.

We're finding opportunity to continue to focus the portfolios have been in those more economically sensitive or cyclical areas of the market. That would include Industrials. It would include Financials and it would include technology in various different forms. That is the opportunity set from our standpoint, going forward."

Francis also discussed the connection between value-led periods and active management, the subject of a recent whitepaper, The Undiscovered Connection: "We found if you went back in terms of the history of the Russell 2000, in most periods, value tends to outperform.

In those periods where growth outperforms, you tend to see passive do much better than active managers. When value takes a lead, you tend to see active managers do much better. We think that you've seen that baton pass really from growth to value, and therefore, we see an environment where active managers are going to do much better."

Listen to the CEFA Podcast with Francis Gannon here.

Important Disclosure Information

The thoughts and opinions expressed are solely those of the persons speaking as of January 12, 2017 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 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.

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