"Here we go with a few thoughts for 2014 and beyond..." - Chuck Royce Commentary

Among the most unwelcome New Year's obligations are the incessant requests for predictions or fresh ideas. Every year we're asked... and, like everyone else, every year we're almost always wrong. Nonetheless, here we go with a few thoughts for 2014 and beyond...

We think the market will continue to have bouts of strong performance, similar to what we saw in 2013, though these up phases will likely be coupled with sharper declines and corrections.

As you may know from our Royce Funds' material, since 1997 there have been corrections of at least 7.5% in the small-cap Russell 2000 Index roughly every two to seven months or so. For some time, our prediction for the market has been that returns for equities should average in the upper single digits, providing a long-term advantage over bonds and inflation—and this has certainly been true for the five- and 10-year periods ended November 30, 2013.

However, one of our esteemed colleagues, Dave Gruber, pointed out recently that forecasts in that range have been distinctly off the mark... apparently there have been no calendar year returns in the 6-16% range for the small-cap index since its inception at the end of 1978.

• SPY 30-Year Financial Data
• The intrinsic value of SPY
• Peter Lynch Chart of SPY

Maybe we should stop making market forecasts and simply repeat our investment goal—we try to find stocks with absolute return potentials of 100% over three to five years—and let the chips fall where they may in the short term, which we think should result in satisfactory relative performance in most market cycles... Ideally we can accomplish this with less volatility and better downside performance during negative periods... This is our goal and expectation... not to be confused with a market prediction for 2014...

Important Disclosure Information

Chuck Royce is President, Co-Chief Investment Officer, and a portfolio manager of Royce & Associates, LLC, investment adviser for The Royce Funds. Mr. Royce’s thoughts in this piece are solely his own and may differ from those of other Royce investment professionals, or the firm as a whole. There can be no assurance with regard to future market movements. There can be no assurance that any Royce Fund will achieve its investment goals or objectives.

Investments in securities of small-cap companies may involve considerably more risk than investments in securities of larger-cap companies. (See “Primary Risks for Fund Investors” in the prospectus.) Please read the prospectus carefully before investing or sending money. 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 is an unmanaged, capitalization-weighted index of domestic small-cap stocks. It measures the performance of the 2,000 smallest publicly traded U.S. companies in the Russell 3000 index. The performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index.