Small-Cap Opportunities in a Bull Market

By Chuck Royce Last updated January 24, 2014

President, Director of Investments, and Portfolio Manager Chuck Royce looks at 2013’s small-cap performance and how he’s finding ideas in an expensive market, and sectors he believes are well positioned for strong performance.

“Small-caps did very well in 2013. Once the market got going—and we had a virtually straight-up market with almost no corrections—once it got going, small-caps did sort of take over the leadership, as they would normally in a strong momentum market.

There were no corrections in 2013, and that’s not typical. Typically, there are corrections every two or three months of a certainly 5-7% range”

“We’re being asked very consistently today, ‘Is the Russell 2000 overvalued? Are valuations good enough to invest in?’ And our answer is a very nuanced one—that the index itself would appear on the surface to be at a high valuation, but that isn’t in itself a factor in our investment criteria. We are looking at individual stocks that we believe can have an absolute return; a substantial absolute return over the next three to five years. So, we worry less about how the index appears to be valued.

In addition, there are another X number of stocks domestically, and five times that number abroad, and I am highly confident we’ll continue to find interesting values. ”

“We’re continuing to look in our favored areas, the quality sector, the micro-cap sector. Micro-cap remains a very interesting area.

Micro-caps did very well last year. We continue to think that’s one of the great inefficient sectors. In the quality world, I think Industrials will do a lot better in the years ahead, and Materials and Technology.”