A conversation between Chuck Royce and Chris Clark Last updated June 10, 2014
In the post financial-crisis period, there has been much debate over active versus passive strategies. Co-Chief Investment Officer Chris Clark and Chuck Royce discuss this topic, along with active management in the small-cap space, the characteristics of an actively managed portfolio versus those of an index-based portfolio, current small-cap opportunities, and the case for active management in today’s environment.
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Chris Clark: There’s been much debate about active versus passive strategies, certainly in the post financial-crisis period. What do you think about the opportunities that are presented in each, and specifically, how does it affect us in the small-cap space?
Chuck Royce: Passive strategies work terrifically from the bottom because you’re 100% invested. But we’re now entering a different period. Active management always adds value in the long term, especially in the small-cap space. So I’m very optimistic about active management, especially in the small-cap space.
Chris: Talk a little bit about sort of comparing what we can create in an actively managed portfolio versus the characteristics of the benchmark in the small-cap space that a lot of people have used as a proxy for investing in small-cap stocks.
Chuck: The favorite proxy has been the ETF involving the Russell 2000. The Russell 2000 is made up of 2,000 companies, with a significant number of companies that aren’t profit making at all. It’s made up of many, many speculative areas that we are not investing in. Our abilities to create a smaller portfolio using risk aversion techniques is profound, and we believe that can create value in the short term, especially in a volatile market, but compounding value in the long term.
Chris: You know a corollary to this conversion about the Russell 2000 is valuation. People use, obviously, the Russell as a benchmark for valuation in the small-cap space. By that measure, small-cap stocks do not look inexpensive. What are we finding in terms of the opportunity set of ideas that’s available to us?
Chuck: The wonderment of the small-cap space is its broadness. We can find very specific companies that give us the reasonable chance of compounding money at a decent rate from here.
Chris: Returning to the active/passive debate, passive strategies have garnered all the flows in the market of the expensive active managers. Is that something that’s structural? Is that in place for forever or is there a way for active managers to sort of re-exert their importance in investor portfolios?
Chuck: I think active managers have to re-earn their stripes, and I’d like to think that’s going on right now. And I think the whole passive mania is partly a fashion and partly a short-term phenomenon.