Royce Funds Commentary - 1Q15 Market: Slow Start Leads to Solid Gains

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Apr 03, 2015

We believe U.S. equity returns for the next five years will be positive, but lower than the last five. We think companies with stronger fundamentals will be market leaders in this lower-return environment, which should favor disciplined active stock pickers.

Slow Start Leads to Solid Gains
A bearish January gave way to solid first-quarter gains. The small-cap Russell 2000 was the leader among the broad-based domestic indexes, up 4.3% versus gains of 1.6% and 1.0% for the large-cap Russell 1000 and S&P 500 indexes, respectively. The more tech-oriented Nasdaq Composite was also strong with a 3.5% first-quarter return.

New Highs for U.S. Equity Indexes
The three broad-based indexes made new highs in March while the Nasdaq Composite ended the quarter within 3.0% of its March 2000 peak.

Small-Caps Still Strong from 2009 Low
From the March 9, 2009 market low, the Russell 2000 was up 296.3% through 3/31/15, ahead of the Russell 1000, S&P 500, and Nasdaq Composite.

Rising Rates May Not Slow Stocks

From the interest rate low on 5/2/13 through 3/31/15, small-cap and large-cap indexes were up more than 34%—maybe rising rates don’t necessarily spell gloom and doom for equities?

Large is in Charge
Trailing one-, three-, and five-year returns ended 3/31/15 favored large-caps, with the Russell 1000 outperforming the Russell 2000.

Are Non-U.S. Stocks Joining the Bull Party?
Non-U.S. equities performed more in line with their U.S. counterparts. For the quarter, the Russell Global ex-U.S. Small Cap Index returned 3.7% while the Russell Global ex-U.S. Large Cap Index was up 3.5%. However, trailing one-, three-, and five-year results through 3/31/15 were significantly behind their U.S. cousins.

Good Health, Low Power
Within the Russell 2000, Health Care was the best-performing sector in the first quarter by a wide margin. In contrast, Telecommunication Services and Energy were the worst.

Shorter-Term Strength for Small-Cap Growth
Within small-cap, growth led value (by a large margin) for the third consecutive quarter. The Russell 2000 Growth Index finished the quarter up 6.6% versus a gain of 2.0% for the Russell 2000 Value Index. While trailing one-, three-, five-, and 10-year periods ended 3/31/15 favored small-cap growth, small-cap value was the leader for all periods (15-, 20-, 25-, 30-, 35-year) beyond 10 years.

Micro-Caps Rebound, Mid-Caps Impressive
Micro-caps renewed their winning ways, with the Russell Microcap Index up 3.1% in the first quarter. While 12-month results for the micro-cap index trailed those for small-cap (Russell 2000), three- and five-year returns ended 3/31/15 were higher. Mid-caps continued their impressive ascent, with the Russell Midcap Index up 4.0% during the quarter.

Important Disclosure Information

This material is not authorized for distribution unless preceded or accompanied by a currentprospectus. Please read the prospectus carefully before investing or sending money. Investments in securities of micro-cap, small-cap, and/or mid-cap companies may involve considerably more risk than investments in securities of larger-cap companies. (Please see “Primary Risks for Fund Investors” in the prospectus.) Investments in foreign companies may be subject to different risks than investments in securities of U.S. companies, including adverse political, social, economic, or other developments that are unique to a particular country or region. (Please see “Investing in International Securities” in the prospectus.)

The thoughts concerning recent market movements and future prospects for small-company stocks are solely those of Royce & Associates, LLC, and, of course, there can be no assurances with respect to future small-cap market performance. All indexes referenced are unmanaged and capitalization-weighted. All index returns include net reinvested dividends and/or interest income. Russell Investment Group is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Russell© is a trademark of Russell Investment Group. The Russell 2000 Index is an index of domestic small-cap stocks that measures the performance of the 2,000 smallest publicly traded U.S. companies in the Russell 3000 Index. The Russell 1000 index is an index of domestic large-cap stocks. It measures the performance of the 1,000 largest publicly traded U.S. companies in the Russell 3000 index. The Russell 2000 Value and Growth indexes consist of the respective value and growth stocks within the Russell 2000 as determined by Russell Investments. The Russell Microcap Index includes 1,000 of the smallest securities in the small-cap Russell 2000 Index, along with the next smallest eligible securities as determined by Russell. The Russell Midcap Index measures the performance of the mid-cap segment of the U.S. equity universe. It includes approximately 800 of the smallest securities in the Russell 1000 Index. The Russell Global ex-U.S. Small Cap Index is an index of global small-cap stocks, excluding the United States, The Russell Global ex-U.S. Large Cap Index is an index of global large-cap stocks, excluding the United States. The S&P 500 is an index of U.S. large-cap stocks selected by Standard & Poor's based on market size, liquidity, and industry grouping, among other factors. The Nasdaq Composite is an index of the more than 3,000 common equities listed on the Nasdaq stock exchange. The performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index.