How have you been coping with all of the market's volatility?It's been a very formidable challenge. For us as a firm, what's been most difficult has been the straight-up, straight-down behavior, which was probably best exemplified by last year's movement down from late last April through early October, and then mostly straight up right through late March. Most of the market's movements since the bottom in March 2009 have been short-term swings up or down. The unfortunate consequence of this pattern is that our own funds have not had the time to create the spread that we would seek to build through a full market cycle. This has left us having to play catch up. Many of our portfolios have not done as well as I would like in recent down periods, and many haven't performed any better in the upticks. Yet I'm still confident, both in our approach and in our holdings. I expect that we are returning ever so gradually apparently to a more historically normal market, which I think will be less extreme, without as many of these 20% down moves followed by 25% upswings that we saw last summer and fall and have seen so far this year. I expect more normal ranges in the market to come, where our funds can generate strong absolute and relative performance over the long run.
How important has it been to maintain patience and discipline in the current market?The ability to be patient is probably the single most important quality that an investor who seeks strong long-term returns can possess. Of course, it's easy to talk about the importance of patience and discipline when returns are solid and things are going well. But at some point both will be tested, and they're being tested in this market. It has been a very difficult time.
Do you still believe in the long-term viability of equities? Yes. I do believe that equities remain the best way—maybe the only way—to beat inflation and build wealth over the long term. I also think that equities are capable of beating the fixed income markets over the next five years. My guess is that stocks can deliver returns in the mid- to upper-end single digits, which I think would be respectable on an absolute basis and higher than the rate of inflation. When things are working well, the underlying parts of an equity portfolio—the companies themselves—are compounding machines, compounding their book value, their return on equity, etc. We are confident that we can create portfolios that can grow effectively, especially in a more historically typical market climate.
Where are you seeing the most compelling value in the small-cap market? At the risk of sounding extremely self-serving, we think the most compelling valuations are, in many cases, in our portfolios right now. By and large, we think that our portfolios are made of very high-quality companies. We believe in the strengthened industrial sector here in the U.S., and in the ongoing prospects for companies involved in creating intellectual property, those that are contributing knowledge to a variety of other businesses around the globe.
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Distributor: Royce Fund Services, Inc.