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By Jason Stipp | 11-13-2012 12:00 PM

Kaplan: Finding Upside in a Challenging Environment

If we can pay a low value for companies relative to a very muted outlook, we have a lot of ways to be surprised on the upside, says Royce Value manager Jay Kaplan.

Jason Stipp: I'm Jason Stipp for Morningstar.

We're checking in today with Jay Kaplan, of small-cap specialist Royce to get some insights on the small-cap investing space and also some updates on the funds' strategies today.

Thanks for joining me, Jay.

Jay Kaplan: You're welcome.

Stipp: You're a manager on the Royce Value portfolio. I took a look at that portfolio recently. You have pretty big stakes in energy and materials companies, higher than the category norm, as of the last reported portfolio.

These sectors have lagged some other sectors in recent times. Can you talk about some of the opportunities you've find there, and if your thinking has changed about that sector recently?

Kaplan: Well our thinking hasn't changed, and materials encompasses a really broad spectrum of companies. So energy is kind of part of that, metals and mining are part of that, steel is part of that, chemical is part of that, fertilizer is part of that. So grouping it together can be a little bit tricky, but there a lot of different opportunities across a lot of different areas.

We haven't really changed our thoughts on some of these. They are growing, they are inexpensive, they are attractive in the long term--a little out of sync right now, perhaps, but we think that will be cured over time.

So everything we do is with a three- to five-year time horizon. So we're trying to look out a bit, and we think everything's going to work out over time.

Stipp: Have you been adding to any these positions? There has definitely been some weakness in those sectors broadly. Have you been adding to any of them?

Kaplan: I've been adding a little bit to energy in here outright, and the other thing that's going on is, fund flows haven't been great in small-cap equity funds. So if we don't sell some of the material stocks when funds flow out, that kind of brings the weightings up. So even though maybe we're not exactly buying, we may be bringing some of those weightings up as we sell some things that aren't quite so attractive.

Stipp: You folks are generally long-term investors. You'll hold positions for a long time. You're buying sometimes smaller cap stocks and you'll let them grow into the mid-cap space. So you sort of let them run. As you're looking at your portfolio today, are there any firms that you've had for a while that you still a lot of runway left that maybe you've grown up with a little bit? Any stocks you feel like, these are going to be great for the long-term and even beyond?

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