Small-Cap Investing In An Election Year
- First-quarter performance
- Small-cap perspective
- Portfolio performance, positioning and outlook
- Second generation portfolios, first class results
- Q&A with Chuck, Whitney and Jack
First-Quarter 2012 Review (through 3/31/12)
- The rally that began in 2011’s fourth quarter continued in 2012’s first quarter-Russell 2000 has its best first quarter since 2006
- Performance from the October 3, 2011 market low through March 31, 2012 remained impressive for all indexes and especially small-cap
- 2012’s first quarter also saw the Russell 1000 reach a new high, while the Russell 2000 and S&P 500 indexes remained 2.5% and 1.0% below their peaks set in 2011 and 2007
- Three-year average annual total returns ended 3/31/12 were especially robust; five-year average annual returns were considerably tamer
- Non-U.S. equity indexes fared equally well during 2012’s opening quarter
- Within small-cap, growth led the way in 2012’s first quarter
- According to Bank of America/Merrill Lynch, the dynamic first quarter favored non-dividend-paying companies
- Micro-caps enjoyed especially strong first quarter performance
Second Generation Portfolios, First Class Results
In Core and Core + Dividends categories where we offer multiple funds, our second generation offerings:
- Offer greater flexibility in terms of market cap range
- Are typically smaller in size
- Have a greater percentage of investments outside the
However, portfolio manager continuity and investment approach are generally consistent across each Fund, be it first or second generation offering
Please note, we will only be answering questions about our open end funds. All performance information reflects past performance, is presented on a total return basis, and reflects the reinvestment of distributions. Past performance is no guarantee of future results. Current month-end and quarter-end performance information is available on roycefunds.com. Please read the prospectus carefully before investing or sending money. You may obtain a current prospectus for any of the Royce Funds on our website at www.roycefunds.com/prospectus, or by calling 800-841-1180. The prospectus includes investment objectives, risks, fees, expenses, and other information that you should read and consider carefully before investing. The distributor of the Royce Fund and Royce Capital Fund is Royce Fund Services, Inc., a wholly owned subsidiary of Royce & Associates. This event will be recorded. I would now like to introduce Jack Fockler, Managing Director of Royce & Associates.
Jack Fockler: Good afternoon, everyone, and welcome to our twice a year conference call for investment advisors. My name is Jack Fockler. With me today is Chuck Royce, and Whitney George and David Nadel, as well.
In today’s call, we want to address first quarter performance. We want to also talk about portfolio performance, positioning and outlook. We want to spend a few moments talking about some of our second generation portfolios. And most importantly, we want to save time to answer your questions. If you have a colleague, or colleagues, who are unable to join us today, a replay of the call will be available starting later this week on the Advisor section of our website, roycefunds.com.
Let’s get started. As you probably know, 2012 has gotten off to a great start. It is, in fact, one of the best opening quarters for the Russell 2000 since the first quarter of 2006. The small-cap Russell 2000 was up about 12.4 percent through the end of March. This compares to gains of 12.6 and 12.9 for the S&P 500 and Russell 1000 and 18.7 for the tech-oriented NASDAQ Composite.
Also, in contrast to last year, volatility is down dramatically as measured by the VIX Index, down about 30 percent. Performance actually from the market bottom on October 3rd has been very dynamic, and especially for small-caps. The Russell is up about 37 percent from that low through the end of the first quarter. The Russell 1000 also made a new high in the first quarter, and the Russell 2000 and S&P 500 are trading at miniscule amounts below that level.
Three-year returns, as you probably know, have been very dynamic. They’re above 20 percent for all major indices, and five-year returns are dramatically tamer, 6 percent or below for all the major indices. And finally, non- US equities actually did quite well also. Small-caps actually did better abroad than they did in terms of large caps. So we’ve gotten off to a pretty dynamic start. Let’s go to Chuck for some thoughts on performance in the first quarter. Chuck?
Chuck Royce: Sure. We were thrilled with the overall market’s behavior. We had been sort of optimistic for this year, and remain optimistic. We had felt that there would be a gradual decline in sort of the headline activity that had kept people off balance all of last year, and that, although the major issues are not resolved, we thought the stock market would be more likely to respond positively to just the slowdown of incremental bad news. So we are thrilled with the market performance and our own performance.
Jack Fockler: Do you think this can continue, Chuck, through year-end?
Chuck Royce: Well, it certainly can continue at the rate we started off on. I think we’re going to have a bumpy but positive rest of the year, and I think the year is going to be an excellent one.
Jack Fockler: Looking out over the decade, what are your expectations?
Chuck Royce: I think we’re in a decade of reasonable returns, 6 to 9 percent, nicely better than the prior decade. I believe that without being able to point to specific reasons why we’re going to get there, but I think there’s a remarkable sort of pent-up demand for equities, and the performance of the underlying companies are certainly in excess of 6 to 8 percent.
Jack Fockler: The returns for both US indices and indices abroad were very closely correlated here in the first quarter. What’s your take on this?
Chuck Royce: The correlation continues. The directional correlation is a fact of life. It isn’t our preferred way the world works, but that’s what’s going on. There is more non-correlative, you know, within an index. Certainly sectors do well, other sectors do poorly. That’s — that is going on. Everything is not directionally correlated. But certainly, globally, it’s directionally correlated.
I do think that will separate out over time as various styles do better or worse. So I do think correlation is not permanently at the level it is, but it’s certainly a fact of life.
Jack Fockler: There’s a lot written in the professional press about large-caps being more attractive than small-caps. What’s your take on that?
Chuck Royce: Well, that’s the big thing out there. That’s the new big thing, is large-caps are inherently undervalued, and certainly you can make a statistical case for that. The issue — I think it’s way too of a generalized thought. In
the small-cap world, first place, it is multiples, 10 or 15 times bigger than the large cap world in terms of number of participants. You have very, very clear sectors and styles that are nicely underpriced relative to large-cap. In the higher quality world, which is, call it, the top 10 or 15 percent of small-caps, we believe we can statistically document that they are, in fact, underpriced relative to similar large-cap stocks.
Jack Fockler: Let’s move on, talk a little bit more about small-cap very specifically. Obviously, if you separate into style, growth had a very good quarter. Growth had actually underperformed value in each of the last two quarters of 2011. It’s led the way here in the first quarter by about a couple hundred basis points. In fact, if you look at trailing returns for the one-, three-, and five-years, small-cap growth has done better, but when you go out beyond
that, 10 years and beyond, value tends to do better.
Dividends are something we’ve talked about in the small-cap universe. It’s not something people are really focused on. Last year, dividend paying stocks outperformed. This year, dividend paying stocks have actually lagged. Non-dividend payers within the Russell were up about 15 percent in the first quarter versus a gain of about 9.5 percent for those stocks in the Russell that pay dividends.
And then, finally, the small-end, the smallish end, if you will, of