Can Small-Cap Lead In 2020?—Royce
article , video 01-29-2020

Can Small-Caps Lead In 2020?

Chuck Royce and Francis Gannon recap 2019 and discuss where they’re finding opportunities.


Francis Gannon: 2019 was an impressive year in the small-cap market. What are your thoughts on the overall market?

Chuck Royce: It was quite a year. We’ve had the trade wars and the China conversations and all sorts of other things. What was really different is mega-cap kind of peaked out in July, the super stars, the FAANGs, et cetera, and who knows why? What is clear is that on August 27th there was a sudden shift in the market’s tone.

FG: So, we saw that rotation at that time, and at the time you saw small do better, you saw micro-caps do better. You saw…

CR: Micro-cap did much better. Small did better.

FG: Cyclical did better.

CR: Cyclical did better. Everything did better except momentum and the super mega-caps. And that has approximately persisted till now, a little bit less so this year.

FG: Can you talk to your investors a little bit about how you think about holding periods now in some of these stocks in your portfolio?

CR: I very much believe that valuation is important, but it’s probably not the most important thing, especially in these compounders that we tend to favor in Premier. So, what we’re doing is trying to understand how durable the compounding effect is in the particular stock. Valuation will enter into it, both in how we treat it when we have opportunities to buy it in volatility periods. And we have sort of stopped buying the very, very higher capitalization and higher multiple stocks.

FG: Where are you finding opportunity in the market today?

CR: Having the micro-cap act better has reminded us that that is a big area of opportunity for us, and we are rolling up our sleeves and doing a lot more micro-cap work that can fit nicely into virtually all of our portfolios.

So a theme that we continue to use is, first place, we’re always looking in the underperforming areas. You know, energy has been a big underperformer in the last five years. And we’re looking in there. We’re adding to some of our energy service companies, some of the very high-quality companies that do well no matter what the price of oil is. So that’s an area that we are definitely looking at. We’re also looking at these themes in our more cyclical companies where automation is part of what they are delivering to the customer. We love what looks like sleepy companies that actually have an edge, and the edge would be automation and providing labor-saving equipment to the customer.

FG: We turn the page on a new decade, now that we’re in 2020. You’ve talked about being in a lower-return environment. But the importance of earnings is going to become increasingly more important.

CR: Absolutely. We will not have multiple expansion in the next five years. We had that play, largely generated by rates coming down, way down, over the 10-year period. So that phase is over, and we will have, I think, a more normal market, maybe higher volatility, where earnings will be critical.

FG: So as you think about the next decade, how do you think it’s going to be different than the decade we just completed?

CR: I think small-caps will be a leader. I think we will have, in general, a lower return profile for the whole decade, and I think it’ll be a stock picker’s market.

More Small-Cap Perspectives


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Average Annual Total Returns as of 12/31/19 (%) 

Premier 8.54 34.13 14.15 10.52 11.30 9.69 11.01 11.77 12/31/91
Russell 2000 9.94 25.52 8.59 8.23 11.83 7.92 7.59 9.57 N/A

Annual Operating Expenses: 1.17

1 Not annualized.

All performance information reflects past performance, is presented on a total return basis, reflects the reinvestment of distributions, and does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate, so that shares may be worth more or less than their original cost when redeemed. Shares redeemed within 30 days of purchase may be subject to a 1% redemption fee, payable to the Fund which is not reflected in the performance shown above; if it were, performance would be lower. Current month-end performance may be higher or lower than performance quoted and may be obtained at Operating expenses reflect the Fund's total annual operating expenses for the Investment Class as of the Fund's most current prospectus and include management fees and other expenses.

The thoughts and opinions expressed in the video are solely those of the persons speaking as of January 13, 2020 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.

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