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Chris Clark: Chuck, it seems that there's been a tonal shift in the market over the past sort of 12 to 14 months. What do you see as sort of the evolution of investor preferences in this recent time period?
Chuck Royce (Trades, Portfolio): It's been rather dramatic, and it all started around May 1 of last year, May 2, when the ten-year bond reached its yield low of 1.5%. It rallied from there, and went up to almost 3%. There's been a dramatic shift in what the market seems to favor. The market is now favoring more traditional, more higher-quality companies. That's been good for us. We have a quality theme that runs throughout many of our products.
CDC: 2013 was a year that was somewhat unusual, given the prior years, in that there was no significant correction. In 2014, we've already had two corrections of roughly 8%. What do you think is going on in the market, and is this a healthy pattern or does this bode poorly for the future for stock returns?
CMR: It's a very healthy pattern. Last year was a straight-line market, and markets were up sharply. This year is going to be rockier—I think a more normal environment. We made a high in early March. Markets have come down since, and I think that's been a very positive experience, especially for our style of investing.
CDC: One of the things that we've been very excited to see is our ability to preserve capital in this most recent down period, which has been pretty sharp. What do you attribute that to?
CMR: It goes back to a premise of our firm. The premise is that we're in the risk management business. We want to deliver returns with less volatility.
CDC: And why do you think we might have struggled with that prior to this sort of normalization that's taking place in the yield curve and in interest rates?
CMR: It's clear now, with hindsight, although I'm not sure it was clear then, that that kind of market, with its intense monetary stimulation, favored inferior companies. The inferior company did very well.
CDC: Chuck, some market commentators have sort of expressed the view that we're seeing shades of the year 2000 in the current market experience. Do you think that there are some legitimate comparisons between now and that time period? And what do you think about some of the speculative influences that clearly have manifested themselves in the first quarter?
CMR: I think there is some truth. We've had a speculative market here. We've had a speculative market in inferior companies and in highly speculative specialized areas, internet areas, certainly the social network area in particular, and in biotech. Those have had extraordinary runs, and other companies have lagged.
CDC: How have we guarded against the typical experience of the market? These sectors have run very hard, and then they have corrected. So how have we behaved in this time period, and how have we protected our shareholders from this volatility?
CMR: Our primary protection was not to get involved in these highly speculative securities. We're always looking at the risk factors around a company. So we're benefiting right now in the kind of "all other" category, where we are protecting shareholders' money in this decline.
CDC: Obviously the concept of tapering that was introduced to your point back in May of 2013 is very high on investors' fears in terms of what could derail economic activity, what could derail the stock market, etc. What do you think is the significance of tapering, and how are we approaching our investments as it relates to what inevitably will be a higher interest-rate environment?
CMR: I do think it's inevitable. I think it's very healthy. I'm sort of rooting for this to get going again, but I think the pace has been actually a very healthy one, and I think the market response has been minimal. So I do think we're entering into a very strong period for active management, which is going to be encouraged by normal interest rates.
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