Can A Slow-Growth Environment Create Opportunities? by Royce Funds
Portfolio Manager Bill Hench on areas of the small-cap consumer market that he currently finds attractive, using volatility to purchase stocks at highly attractive prices, the effect a rise in rates might have on some of his holdings, and more.
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“In the first quarter of this year, what we saw was a continuation of what things looked like last year, which is to say we’ve had growth but it hasn’t been great growth. We’ve had better employment but it hasn’t been great employment.
“But we do think there are things to take advantage of in a market like this. We think the lower energy price creates a great opportunity to be long the consumer. So whether it’s things related to housing, retail, specialty retail, or anything that you could spend your consumer dollars on, we think there’s great opportunity.
“The nonresidential part of the market we think is in full bloom right now. Whether it’s in the big cities on the coasts or in the tertiary markets, things have picked up. We expect that to continue. Building is going very strong, financing is available, and the companies are ready to do things at very good margins.
“The small-cap and micro-cap parts of the market tend to be more volatile than the big caps. They usually don’t have as good an opportunity to finance themselves, their managements, although very good, tend to be a little thinner, and liquidity in these markets tends to be very suspect during times when the market is under stress.
“So volatility is clearly part of the game here, but it’s also a big part of what we take advantage of. In other words, when the market is activing very poorly, it usually creates great pricing and great opportunities for us to buy stocks.
“It’s hard to predict whether or not things will be more or less volatile but we do know that we will have volatility. And when it approaches and when it’s with us, we take advantage of it. If we don’t take advantage of it, I don’t think we could get the returns that are possible in this part of the market.
“Our holdings should do very well if rates go up for the right reasons. If rates go up because the economy is so strong that demand for money is robust, our companies are probably going to make a lot of money. Our stocks tend to move on earnings. P/E multiples are not as important during the turnaround because the P/E multiple does not reflect their true earnings power.
“So if the market sees an opportunity where growth will be robust and, therefore, rates are up, we should do very well.”