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By Jason Stipp | 11-14-2012 02:00 PM

Royce: Better Times Ahead for Quality Stocks

Royce Funds president and co-CIO Chuck Royce says equities are entering into a much better market period in the next three to five years than in the last three to five years, while bonds are in a bubble.

Jason Stipp: I'm Jason Stipp for Morningstar. We are checking in today with president and co-CIO of Royce Funds Chuck Royce to get his take on small cap investing in today's environment. Thanks for joining me, Chuck.

Chuck Royce: Great.

Stipp: Recently you had an update to shareholders that said, "unfortunately the recent pattern of risk-on, risk-off behavior has not allowed the market to establish a consistent direction."

Given that macro headlines seem to be dominating the market on a day-to-day basis. As a fundamental investor, has it been a frustrating environment for you to work in?

Royce: I think that's absolutely correct. This whole idea of risk-on, risk-off is probably a way too complicated way of saying that things have become more correlated on the way up and on the way down.

We are in the active management category. We want to win over time. We want to beat our appropriate benchmarks. It has been tougher in this kind of directional market--straight up, straight down. I'm looking forward to return to more normal period, which I think is coming and has sort of started in the last couple of months.

Stipp: Sometimes when the market is up or down on a big macro news [headline], you can go in and find opportunities, things get mispriced.

But might we expect to see some of that mispricing continue until some of this uncertainty clears up? The European situation that seems to be dominating headlines, now this fiscal cliff that everyone is just intently focused on. Will it be a while, do you think, until we start to see convergence?

Royce: We're never going to clean up all the macro headlines. What we do is try to work underground. We're always working underground. There is always macro headlines. You cannot go back to a single year where there wasn't kind of a worry or a big deal.

So, when I say we want to go back to normal, normal still is macro headlines, but normal is less correlation, less of a directional move in the market, and more of a routine market, if there is such a thing, with returns in the positive cycle, but not so high that we can't do better.

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