Royce: Small-Caps at a Relative Disadvantage

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3Q14 Market: INDEXRUSSELL:RUl Small-Caps at a Relative Disadvantage by Royce Funds

We believe that equities continue to represent an attractive option, that fundamentals matter, especially on a long-term basis, and that stock pickers, i.e., active managers, are uniquely positioned to add value in the current market environment and beyond.

Despite a strong August, small-caps were unable to overcome a difficult July and an equally challenging September to continue their streak of positive quarterly performance, which lasted eight consecutive quarters.

In fact, it was the worst quarter for small-caps, as represented by the Russell 2000, since 9/30/11.

In addition, small-caps fell behind their large-cap counterparts for the second consecutive quarter, their worst relative quarterly performance since 3/31/99. The small-cap Russell 2000 Index was off 7.4% versus gains of 1.1% and 0.7% for the large-cap S&P 500 and Russell 1000 Indexes, respectively, for the third quarter. The tech-oriented Nasdaq Composite was up 1.9% for the same period.

Year-to-date through 9/30/14, large-caps retained and built on their 2014 performance advantage, with the S&P 500 (INDEXSP:.INX) and Russell 1000 Index (INDEXRUSSELL:RUI) up 8.3% and 8.0%, respectively, versus a loss of 4.4% for the Russell 2000. The Nasdaq Composite gained 7.6% for the same period.


Poor relative performance aside, the Russell 2000 (INDEXRUSSELL:RUT) still managed to establish a new high during the quarter, as did both the S&P 500 and Russell 1000 Index (INDEXRUSSELL:RUI).

Within the Russell 2000, Consumer Staples and Health Care were the leading sectors in the third quarter while year-to-date through 9/30/14, Utilities and Health Care were the top performers.

Trailing three- and five-year performance ended 9/30/14 was outstanding for the Russell 2000, S&P 500, and Russell 1000 – average annual total returns exceeded 14% in each period for each index (WOW).

From the 10-year Treasury bond low on 5/2/13 through 9/30/14, overall equity returns were terrific. For this period, the Russell 2000 rose 19.5%, the S&P 500 was up 27.2%, and the Russell 1000 Index (INDEXRUSSELL:RUl) advanced 27.3%.

Non-U.S. equity results for the quarter were more in line with U.S. small-cap returns—for the third quarter, the Russell Global ex-U.S. Small Cap Index was off 6.2% while the Russell Global ex-U.S. Large Cap Index was down 5.4%. Year-to-date, returns for both non-U.S. indexes were sandwiched between their domestic counterparts. The Russell Global ex-U.S. Small Cap Index provided a slight edge, up 0.9% while the Russell Global ex-U.S. Large Cap Index returned 0.2%.

Within small-cap, growth outperformed value during the quarter and for the year-to-date period ended 9/30/14. For the quarter, the Russell 2000 Growth Index was down 6.1% versus a loss of 8.6% for the Russell 2000 Value Index. Year-to-date ended 9/30/14, the small-cap value index was down 4.7% versus a loss of 4.1% for the small-cap growth index.

Mid-cap returns fell between their large- and small-cap counterparts, with the Russell Midcap Index down 1.7% for the third quarter yet up 6.9% year-to-date through 9/30/14. In contrast, micro-caps continued to struggle, with the Russell Microcap Index down 8.2% for the quarter and off 6.8% for the year-to-date period.

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