Quarterly Small-Cap Equity Factor Review—Royce
article 04-17-2024

Quarterly Small-Cap Equity Factor Review—1Q24

QTD and YTD Factor Performance

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Momentum Leads the Pack

In the first quarter of 2024, the high momentum factor emerged as the standout performer among those examined by Royce within the Russell 2000 (as seen below in the chart), up 4.9%, while 5-year asset growth was the worst performing factor, down -0.4%. The Russell 2000 finished the quarter up 5.2%, ahead of all examined single factors.

The effectiveness of single factor performance to explain returns was diminished this quarter, primarily due to the exceptional performances of two stocks: Super Micro Computer (up 255%) and MicroStrategy (up 170%). Together, these stocks accounted for 38% of the Russell 2000’s return for the quarter. Consequently, the equal weighted Russell 2000, which rose 2.4%, did not benefit from the amplified weighting in those two stocks.

Small-Cap Factor Performance in 1Q24 and 2023
Average Annual Total Returns for QTD and 1-Year Periods for the Deep Value, Quality Value, and Dividend Value Factors Within the Russell 2000 Index

Subsequent Average Annualized Three-Year Return for the Russell 2000 Starting in Monthly Rolling VIX Return Ranges

Past performance is no guarantee of future results. The performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index.

Royce Small-Cap Dividend Value Takes Lead Among the Royce Multi-Factor Indexes

In the first quarter of 2024, a notable turnaround unfolded, as Deep Value’s strong performance in 4Q23 reversed itself, underperforming the overall small-cap index with a loss of -0.8%. As mentioned, the Russell 2000 rose 5.2%, while Royce’s multi-factor-based indexes posted mixed results: Dividend Value was up 6.9%, and Quality Value advanced 1.4%.

Royce Multi-Factor Index Performance
Average Annual Total Returns for 1Q24, 2023, and from the Russell 2000 Peak on 11/8/21

Subsequent Average Annualized Three-Year Return for the Russell 2000 Starting in Monthly Rolling VIX Return Ranges

Past performance is no guarantee of future results. The performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index.

From the Russell 2000 peak on 11/8/21 through the first quarter of 2024, the Royce Small-Cap Dividend Value Index demonstrated exceptional resilience, gaining 21.0%. In contrast, the broader small-cap market, represented by the Russell 2000, declined -9.9% over the same period. We believe these results underscore the defensive characteristics that factors such as paying dividends often possess during challenging markets.

Outlook

In the first quarter of 2024, the small-cap market drifted higher amid investor anticipation of summer interest rate cuts. However, it remains uncertain whether inflation is sufficiently subdued to support such actions by the Fed. The Deep Value Index typically thrives in accommodative interest rate environments. Despite stabilization in the money supply growth rate, it remains significantly negative on a year-over-year basis, and in 1Q24 this Index reversed its performance from 4Q23. We will monitor improvements in this index as it correlates to the expansion of money supply and tends to be our better performing index at the beginning of market cycles.

Important Disclosure Information

The thoughts concerning recent market movements and future prospects for small-company stocks are solely those of Royce Investment Partners, and, of course, there can be no assurances with respect to future small-cap market performance. Past performance is no guarantee of future results. Historical market trends are not necessarily indicative of future market movements. The performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index.

1High Growth Small-Caps are the top quintile of securities within each Russell 2000 FactSet sector, sorted by each company’s asset growth over the past five years. High Momentum Small-Caps are the top quintile of securities within each Russell 2000 FactSet sector, sorted by each company’s total return over the past year, excluding the most recent month. Small Size Small-Caps are the bottom quintile of securities within each Russell 2000 FactSet sector, sorted by each company’s market-cap. High Value Book-to-Price Small-Caps are the top quintile of securities within each Russell 2000 FactSet sector, sorted by the inverse of each company’s P/B (share price divided by book value per share).

2High Value Earnings Yield Small-Caps are the top quintile of securities within each Russell 2000 FactSet sector, sorted by the inverse of each company’s P/E, i.e. its earning yield (share price divided by trailing 12-month earnings per share). High Profitability Small-Caps are the top quintile of securities within each Russell 2000 FactSet sector, sorted by each company’s ROA (trailing 12-month net income divided by the two fiscal period average total assets).

3Dividend Payer Small-Caps are securities within the Russell 2000 that paid a dividend within the last 12-months. Low Volatility Small-Caps are the top quintile of securities within each Russell 2000 FactSet sector, sorted ascending by each company’s 90-Day Price Standard Deviation. Standard deviation is a statistical measure within which a company’s stock price has varied over time. The greater the standard deviation, the greater the volatility. Low Leverage Small-Caps are the top quintile of securities within each Russell 2000 FactSet sector, sorted ascending by each company’s Net Debt-to-LTM EBITDA (earnings before interest, taxes, depreciation and amortization).

All factors are equal weighted, rebalanced quarterly, and performance is calculated monthly.

The Royce Small-Cap Quality Value Index is a proprietary index composed of small-cap stocks trading in the United States with relatively low valuations, high profitability and high debt coverage compared with the average of stocks in the investment universe. The Royce Small-Cap Deep Value Index is a proprietary index composed of small-cap stocks trading in the United States with relatively low valuations and high debt coverage compared with the average of stocks in the investment universe. The Royce Small-Cap Dividend Value Index is a proprietary index composed of small-cap dividend paying stocks trading in the United States with relatively low valuations, high profitability and high debt coverage compared with the average of stocks in the investment universe. Royce has retained Solactive AG, an unaffiliated third party, to calculate the Underlying Indexes. Solactive AG publishes information regarding the market value of the Underlying Indexes. The full Index rulebooks are available upon request. Past performance is no guarantee of future results. The performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index.

Frank Russell Company (“Russell”) is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company. Neither Russell nor its licensors accept any liability for any errors or omissions in the Russell Indexes and / or Russell ratings or underlying data and no party may rely on any Russell Indexes and / or Russell ratings and / or underlying data contained in this communication. No further distribution of Russell Data is permitted without Russell’s express written consent. Russell does not promote, sponsor or endorse the content of this communication. All indexes referenced are unmanaged and capitalization weighted. The Russell 2000 Index is an index of domestic small-cap stocks that measures the performance of the 2,000 smallest publicly traded U.S. companies in the Russell 3000 Index.

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