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Francis Gannon: Chuck, how do you make sense of the first quarter?
Chuck Royce (Trades, Portfolio): It was certainly a powerful move by any measurement technique. We certainly didn’t predict that kind of movement. We were optimistic towards the beginning of the year, early January, based on that fourth quarter decline using history as our guide. We were comfortable doing what we did, which was to take advantage of that decline. And we certainly felt that the one, two, three-year outlook would be pretty good considering that decline.
But we certainly didn’t have a point of view about this kind of appreciation in the first quarter. We had a big high in the end of August in the small-cap space, and although we’ve had a heck of a move back up, we’re just flirting with that old high now.
FG: In the market decline in the latter part of this year and in, I guess even in the first part of this year, did you find pockets of opportunity?
CR: We absolutely took advantage of the declines. That is our mindset. I truly believe we must use those declines to take advantage of opportunities, and we did.
FG: One of the areas of the market that you focused on for the past I’d say 10 years almost has been the more economically sensitive or cyclical areas of the market industrials, etc. Were you finding or still finding opportunity there?
CR: Sure, we always like that because the market over penalizes the cyclicality. First we start with the basic premise that everything is cyclical. So, there’s really almost no such thing as just straight, linear growth. So, cyclicality does not bother us, and we absolutely used these declines to continue to add to that sector.
FG: Within the cyclical world, what type of businesses have you been focusing on?
CR: We started many years ago looking at automation and the uses of laser in both products and as tools. We were in that area early and we have more or less stayed with it and, now that these stocks have come down, we’ve begun to add to them.
FG: In March of this year, we celebrated the 10th anniversary of this bull market, the bottom of the Great Recession. What do you think the role of an active manager is in today’s world?
CR: I’m so glad you brought that up, that fact, because active managers were substantially disadvantaged in the straight up market from ’09 to ’19. Incredible numbers. Virtually no active manager could keep up with that number, us included. We are risk managers and that’s a primary part of what we do and any time you take risk off the table, you’ve lost your position in the race in that particular run up. We are not going to have another 10-year period like that. We’re not going to have a financial crisis like that.
We’re going to have types of recessions, and rolling recessions, and sector recessions and regional recessions. We’re not going to have a big, bad financial crisis again. So, I think we are, this is part of the road to normal, going back to normal three and five-year returns. I very much believe we are still on that road and that this is a very positive road for active management.
Important Disclosure Information
The thoughts and opinions expressed in the video are solely those of the persons speaking as of April 9, 2019 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.
The performance data and trends outlined in this presentation are presented for illustrative purposes only. Past performance is no guarantee of future results. Historical market trends are not necessarily indicative of future market movements.
