What is your take on the recent European sovereign debt crisis?

It's been worrisome on a lot of levels. There are very real concerns about the viability of the European Union, and these concerns have created a wave of anxiety that's hit the global markets hard. And the situation hasn't been helped by the fact that so many European nations are now angry with each other. So the crisis offers a genuine test for this loose confederation of countries: The EU is united only by a common currency and some common economic interests, and it can't establish tax policy or other fiscal measures for individual nations or the EU as a whole. Having said all that, I think it will survive, though probably with some important modifications to its current form. It seems to me that each country has more to lose by breaking it up than it does by enduring the current pains of hanging together. It's certainly in the best interests of the global economy that it stay together. Over the last several years, global investors have made it clear, for example, that they want a solid currency alternative to the U.S. dollar.

Have these events affected the way that Royce invests in non-U.S. securities?

Not really. The troubled fiscal state of countries such as Greece, Spain and Portugal is not a new development—we have no investments in Portugal, and less than 0.03% of the firm's assets were invested in companies domiciled in Greece and Spain as of the end of June. Our disciplined value approach also leads us to small-cap companies that we think are capable of withstanding economic difficulties, so we think that the bulk of our European investments should ultimately emerge in solid condition. The debt crisis has created ample buying opportunities that we think are very attractive on a long-term basis. As the European markets have stumbled, we've been acting opportunistically to build existing positions and to buy companies whose stock prices have come down to levels that we find enticing. Currency plays are obviously not our stock in trade, but we've also seen opportunity in European stocks in light of the euro's substantial decline over the last several months. So really what the crisis has done for us is to expand the number of prospects in the European small-cap markets.

Should investors be encouraged about the spate of positive and better-than-expected earnings news here in the U.S.?

I'm a bit split on this question. Although I lean more toward the notion that investors should be encouraged by the current earnings picture, I also think that any excitement needs to be tempered by the fact that recent earnings look strong in relation to where companies were in 2008 and early 2009, when most were bouncing off an historically terrible period. In other words, the bar for earnings improvement was set awfully low. However, I think that this is still good news because it shows that many U.S. corporations did what needed to be done—they grew leaner and meaner and effectively dealt with a financial crisis, which is being reflected in stronger earnings. It's also important to remember that long-term growth is not a straight-line phenomenon. Short-term setbacks are a common occurrence in the journey to more lasting success. While the perception seems to be that we are once again struggling, I think the economy is on the right track. I'm not wildly enthusiastic, but I am optimistic.

What do you see as the potential consequences for the stock market in a slow-growth economy?

I see a slow-growth economy as a favorable backdrop for our disciplined style because of its emphasis on company quality. My expectation is that a slow-growth economy is likely to lead investors to focus on two areas—fast-growing companies and high-quality companies. Any business that looks capable of outstripping the pace of the economy as a whole is going to be in high demand, and I can see that benefiting the kind of small-caps that fit our selection criteria—those that boast strong balance sheets, high returns on invested capital and the ability to generate free cash flow.

With investors clearly still apprehensive, what is the case for investing in equities today?

We've been witnessing a stampede out of equities and into fixed income to such a degree that I wouldn't be surprised to see a bubble in fixed income investments in the coming months. I remain convinced that equities will provide stronger returns, particularly inflation-adjusted returns, over the next five- and 10-year periods. It seems reasonable to me that the current decade will end up with equity returns somewhere in the high single digits. Taking advantage of current volatility is, for us, critical toward building strong results for the decade, as well as other long-term periods.