Royce Funds Commentary - Is Defensive Investing The New Offense?
Principal and Portfolio Manager Francis Gannon provides thoughts regarding the economy, the markets and small-cap investing. Francis, a former panelist on Louis Rukeyser's Wall Street, has 19 years of investment management experience and joined our team in 2006.
Despite all the negative headlines facing the market, the small-cap Russell 2000 Index advanced 3.33% during August as the Volatility Index (VIX) traded towards its low of the past five years. Macro uncertainty, however, continues to abound. The minutes of the August Federal Reserve Open Market Committee meeting did little to assuage the economic debate, simply stating that "many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery."
At the same time, the economies of Europe and China continue to weaken, and the approaching U.S. fiscal cliff can only add to the uncertainty as the end of the year draws near. Worries about event risk remain elevated, yet the market has become incredibly risk-averse in its performance. One has to wonder—is defense the new offense?
To be sure, equities are climbing a wall of worry. However, from our perspective being risk averse in today's market is not necessarily risk averse. We think that chasing yield in defensive sectors—the equivalent of searching for risk-free returns—carries increased valuation risk.
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