Two investment tenets have been upended in recent years: one that value stocks, considered cheap by traditional metrics outperform growth stocks, the other that small companies outperform large ones.
Over the last decade, the opposite has been true. Growth stocks have dramatically outdistanced value stocks and large caps have significantly outperformed small company ones.
If you happen to be a value-oriented, small-cap investor it’s been a tough combination which is why contrarian minded observers think now might be a good time to revisit the space.
Chuck Royce, Founder, Chairman and Portfolio Manager of Royce & Associates joins us to discuss how some of his funds have outperformed benchmarks for multiple periods, with below-average market volatility.
WEALTHTRACK Episode #1613; Originally Broadcast on September 27, 2019
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CHARLES “CHUCK” ROYCE
- Founder, Chairman & Portfolio Manager,
- Royce & Associates
Two investment tenets have been up ended in recent years: one that value stocks, considered cheap by traditional metrics outperform growth stocks, the other that small companies outperform large ones.
Over the last decade the opposite has been true. Take growth versus value for instance. Whether you look at the last 3, 5, or 10-year periods growth-oriented companies have far outdistanced value ones. Over the last decade the annualized total return, that’s with dividends included, of the Russell 1000 Growth Index did a third better than value with 15% annualized returns versus 12% for the Russell 1000 Value Index. The five and three-year differences are even more dramatic, with the growth index clocking in 13% annualized returns versus 7% for value over five years, and 18% for growth versus 10% for value over three years.
The Wall Street Journal recently reported research which found that the difference between “the trailing price/earnings ratio of growth and value stocks on the Russell 1000 index hasn’t been this wide since the dot-com crash of 2001.”
The discrepancy between large cap and small cap is not as wide, but it is significant. Although there were periods in the last ten years when small companies held their own, they didn’t last. Large caps delivered 13% annualized total returns versus nearly 12% for small cap over the past decade. However, the gap is far greater in the five and three-year periods:10-1/2% for large versus 7-1/2% for small during the last five years and 14% versus 10% for three years.
If you happen to be a value-oriented, small cap investor it’s been a tough combination which is why contrarian minded observers think now might be a good time to revisit the space. And who better to do it with than the man who pioneered the concept of small cap stocks as an asset class and has a decidedly value focused approach.
He is Chuck Royce, Founder, Chairman and Portfolio Manager of Royce & Associates the investment adviser to The Royce Funds. He is lead portfolio manager of several funds including his flagship Royce Pennsylvania Mutual Fund which he has managed since 1972. Penn Mutual has outperformed its benchmark for multiple periods, including 1, 3, 15, 20, 25, 30, 35 and 40 years with below average volatility.
Royce is also lead manager of the Royce Premier Fund, a more concentrated portfolio which has also outperformed its benchmark for multiple periods, again with below average volatility.
The Royce Funds are a recent sponsor of WEALTHTRACK but Chuck Royce has been a regular guest since WEALTHTRACK’s inception because of his superb long term track record. The last decade however has been challenging. Both funds lagged the market in the last five and ten year periods.
I began the interview by asking Royce how he explains the fact that small cap stocks have significantly lagged large caps ones over the last decade and why they are now making a comeback.
As always, if you miss the show on public television, you can watch it on our website. In this week’s web EXTRA feature Chuck Royce gives us his secret to accomplishing so much professionally, philanthropically and personally.
If you haven’t had a chance to do so, we would very much appreciate if you could participate in the anonymous survey that you’ll find on the website, too.
Thank you for watching. Have a lovely weekend and make the week ahead a profitable and a productive one.
Best regards,
Consuelo
REMEMBER TO REBALANCE INTO OUT OF FAVOR SECTORS.
- U.S. growth stocks, mega-caps, in particular, have dominated markets and portfolios for years
- Their powerful performance means they have outsized positions in indexes and portfolios
- Out of favor groups like small caps, cyclical stocks, value, and emerging markets have been beaten down and in many cases are selling at the lowest relative values to large-cap growth since the financial crisis
- Divergence in valuations has created an opportunity not seen in years, to take some profits from overvalued large-cap growth and add to these unpopular and undervalued sectors
No Bookshelf titles this week.
SERIOUS ASSET CLASS
- Own International Small-Cap Stocks
- Undervalued, Unrecognized Investment Class
- Ares Management LP (ARES)
- KKR & Co LP (KKR)
- Quaker Chemical Corporation (KWR)
- Lincoln Electric Holdings, Inc (LECO)
- John Bean Technologies Corporation (JBT)
- Pason Systems Inc (PSI) Toronto Stock Exchange
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ORGANIZING PRINCIPLE
Royce Funds’ founder Chuck Royce is not only a legendary investor, managing multiple mutual funds, he is also personally responsible for the restoration and preservation of historically significant houses, hotels, and even towns, as well as being actively involved in museums, universities and numerous other charitable organizations over the years.
