By Royce Funds
Small-caps have underperformed the broader market so far in 2014. Recent comments from Federal Reserve Chairwoman Janet Yellen only added fuel to the fire.
In her recent semiannual Monetary Policy Report in front of Congress, Yellen stated, “Equity valuations of smaller firms as well as social media and biotechnology firms appear to be stretched,” further noting, “Ratios of prices to forward earnings remaining high relative to historical norms.”
The Chairwoman’s comments did not surprise us. In fact, saying that small-caps valuations are running high is an easy call to make given the Russell 2000′s returns over the past several years — the small-cap index’s five-year average annual total return through the end of June 2014 was 20.2%.
However, a closer look tells a much different story. We have mentioned it before — many high-quality small-caps still look undervalued to us. To be sure, we see quality as