Smaller US companies are holding up in the short term, and could surprise investors on the upside in the long term, according to Royce & Associates, the US small-cap specialist wholly owned by Legg Mason.

ôWe understand that no investor enjoys these periods in which so many companies seem to be struggling and returns are falling further into negative territory. At the same time, declines, corrections and even the occasional bear market are part of the price of doing business in the stock market, especially if one is in it for the long haul,ö says Whitney George, a portfolio manager at Royce & Associates.

The US small cap specialist said its optimism about the next few years is based in part on the speed with which information moves.

ôBecause bad news travels so quickly, the effects hit stocks hard and fast. We believe that the market has thus worked through the bulk of the distress caused by subprime woes, the credit crunch and the prospect of recession. While we are always focused on downside risk, we are just as excited about the promising long-term opportunities that we see in certain smaller stocks in the current market,ö says George.

The interplay between the commodity and financial stock sectors has been a major theme over the past year. Research from Royce & Associates shows that the natural resources sector of the Russell 2000, which includes the energy, oil & gas, precious metals and mining industries, has seen corrections of greater than 10% on four occasions. Interestingly, the financial intermediaries sector has rallied during each of those declines.

ôExperience shows that volatility and regular sector rotation are two of the hallmarks of uncertain economic periods. The current environment is no different,ö George says.

Royce & Associates looks at the most recent correction in the commodity markets as an opportunity to buy back many of the high-quality energy, precious metals and mining, and industrial metals companies where the company had taken profits at the end of the second quarter.

ôWe have always believed that uncovering opportunity in poor market conditions is one of the most effective ways to build strong absolute long-term performance,ö says George. ôOver the long term, US smaller companies offer the kind of absolute performance that demands a place in any well-structured investment strategy.ö

Royce & Associates is a wholly owned affiliate of Legg Mason and entirely focussed on the US small-cap market. Founded in 1972 by Charles M. Royce, one of the pioneers of small-cap investing, Royce & Associates had $29 billion in assets under managements as of June 30.