There was a huge disparity between value and growth during the first quarter.  Where do you see opportunities right now?

There are lots of opportunities in the small-cap universe, period.  We are seeing some very significant opportunities in once-large and mid-cap companies that have dropped down into our small-cap and mid-cap range (market capitalizations from $500 million to $10 billion).  Royce Value Plus Fund has a growth twist to it, and may have benefitted from the fact that small-cap growth lost less than small-cap value in 2009's first quarter, with the Russell 2000 Growth Index down 9.7% versus a loss of 19.6% for the Russell 2000 Value Index. Whenever you see a big divergence in short-term performance, it makes sense to look at longer periods to get some perspective.  Over three- and five-year periods, the performance of small cap growth and value were very close, but when you look at 10-year performance through 3/31/09, small-cap value enjoyed a decided advantage. Of course, we're style agnostic at Royce—we are simply trying to go where the best opportunities are, and our focus on quality balance sheets has helped us a lot in this bear market as we try to position our portfolios for a sustained recovery for stocks.

I feel good about being value-plus-growth in this period.  Three months ago I would have said, "There's no place to hide."  Everything was struggling—every industry, every asset class, except maybe treasuries and gold. It's been an "equal opportunity" recession. I don't think we're completely beyond this difficult economic environment yet. I think that one reason that growth has been doing better in the short run is because, if value and growth companies are both trading at low valuations, and you can't find earnings growth in many industries (organic growth being so scarce), investors have been migrating to traditional growth-type companies, in hopes that those companies will rebound sooner. Still, we're more concerned with the long term and like the prospects for our approach in Royce Value Plus Fund, which emphasizes company quality and growth prospects. Eventually, the market will find a bottom, and it will be off to the races with those companies with good balance sheets that survive and generate positive, organic growth.

How excited are you about the recent rally in the stock market?

It's lasted just a few weeks, so it's too soon to say.  We went through a period in the second half of 2008 where things were going down for no good reason.  Hedge fund liquidations, investment banks going bust, the federal government stepping in to bail out companies—people kind of felt like it was the end of the world and everything came crashing down, and  the market didn't differentiate between right and wrong, good and bad.  It was a frustrating period for many of us.  Our holdings in precious metals and energy hurt us.  So far this year it looks like the market has become more discriminating about quality and valuations.  We benefitted in the first quarter from a recovery in natural resources, for example.  Of course, people are grasping for evidence that the market has hit bottom—that things aren't going to get worse. In the near-term, earnings aren't expected to be great.  And I can't imagine that with the unemployment numbers being what they are that things will spring back to life quickly, particularly for consumer-related businesses.  A delay in the economy's recovery is more likely.  But maybe with the severe correction we've seen, simply not getting worse will be positive for the stock markets.  There have been many false dawns so far in this bear market, but the recent rally is encouraging.

What impact do you think the Obama Administration's policies will have on the markets?

As an investor, I've never really placed a lot of importance on who was running the country or which political party controlled Congress, but I think this time could be different. The one positive is that our President is out in front, trying to rebuild confidence. I'm not sure to what extent fiscal stimulus spending will help the economy in the near term or when it will really kick in.  And  I think you could also make a case that doing too many bailouts will defer tough decisions, such as write-downs, bankruptcies, etc., that should be made today. A lot of government spending can also result in serious inflation and a weaker dollar down the road.  Clearly, we are in a different environment here, with a new Administration and a new set of problems that are as big, if not bigger than those in 1979-81. I think we are on par with that recessionary period, but not the Great Depression—yet.

What positioning strategy makes the most sense in a recession?    

In addition to looking for quality growth companies with strong balance sheets, high returns and attractive valuations, our practice recently has included looking for companies that look like "early risers" in an economic recovery, because we feel confident that there will be one eventually.  I am focusing on building up our holdings in quality companies that should benefit at the early stage of recovery.  For example, industrial distributors (like W.W. Grainger) will probably be early risers… companies with high returns that will do well when businesses start spending again.  Trucking companies are another promising area. With the first sign of recovery, they should really do well given the capacity that has left the industry. Small biotech companies have contracted a lot due to concerns over their ability to raise capital in this environment.  Technology is another promising long-term area. Capital spending has frozen up a bit, but companies need basic levels of spending on tech, whether it's software or hardware. The Fund has even invested in some internet and broadband companies with the same rationale.  

When will you feel comfortable with stocks of companies in the financial industry?

I know I'm early, but I'm already starting to look at the "second tier" commercial banks in the U.S., the new regionals, which have become mid-cap stocks.  Price to tangible book valuations of  banks are now back to where they were at the beginning of the trough of the last down cycle, which was followed by an up-cycle that lasted 10 to 15 years.  Northern Trust, for example, is a very high quality financial institution with two sound, solid business lines:  they offer custody services and wealth management.  And they have very little credit exposure.