Royce & Associates co-CIO Whitney George believes markets are entering a ‘supercycle’ in M&A activity, as the subdued economic environment forces companies to attempt to acquire growth.
George, who oversees $30bn of assets at the New York-based group, says the strong current wave of M&A is likely to continue and is a "global phenomenon".
"We are seeing a supercycle in M&A. There is not much growth out there and there are a lot of strong balance sheets. This is all possible by extremely low financing rates on offer," George, the manager of the UK-domiciled Legg Mason US Smaller Companies fund, says.
"Look at the recent bidding wars in technology. Companies are actively seeking growth. This is happening across the world. Private equity firms too, which have not really done a thing, are going to have to come back to the market soon, or they will have to start giving the cash back.
"Most are these deals are good or fair value, but not all are great. I am not sure about what Intel is doing with McAfee."
George says Royce has a focus on the high-quality end of the smaller companies' spectrum, which is now beginning to benefit the group.
"We have been surprised the low quality nature of the rally continued as far and as along as it did," he says.
"We would have thought higher quality companies have done well a lot earlier, those better businesses with the better balance sheets. It is starting to happen over the last month, quality has been beneficial to the investment returns."
George, who has been at Royce for 19 years, says the market turmoil caused by the credit and financial crisis has opened up strong opportunities for long-term investors such as Royce.
"I think the declines we had in 2008 were a couple-generation phenomenon, because it took a once-in-a-many-generation level complacency going into it to create this kind of carnage," he says.
"People are not going to do that again and have an appreciation for risk that is not going to go away any time soon. We are not going to do it again, our kids will not do it again and maybe our grandkids, if we can talk to them, might also be careful to use things like leverage.
"It has been a good period for us as investors as it created valuations and opportunities the likes of which I have not seen in my career. This includes the 1987 crash, the early 90s bear market, the Asian crisis in 1998 and the internet blowup."
George is also largely unconcerned by the recent equity sell off, as investor fears over the health of the US economy escalates.
"A feature of this year has been the liquidation of equities. Now people are being more proactive in avoiding investments in equities. This is probably good for us, as long term investors the price you pay for these investments is going to be a large factor in the outcome," he says.
"We do not have a view of the world, but if we double dip, a lot is already priced in. if we do not, we might see some surprises."
While Royce saw stable inflows into its products almost every week of 2008 and 2009, investors have pulled money from the small cap funds this year.
"If we are seeing people come out I think others will be seeing the same, if not worse. People are finding it hard to come back in," George adds.
"It might need the markets to move consistently higher but it will take time. But when they do come back they will come into higher quality, so we think we are in a good position.
"We can still find great opportunities at low valuations. Our cash weighting is as the lowest point since March 2009. This says something."
