Our History

We've been cultivating our unique small-cap value style over four decades. Chuck Royce began managing our flagship fund, Royce Pennsylvania Mutual Fund, in 1972 and it bears the earliest imprints of our style.

Over the years, as the small-cap asset class has evolved, so has Royce and our portfolios. We’ve added new Funds, all of which bear a strong Royce family resemblance.

Four Decades of Small-Cap Value Investing

The 1970s: Our Beginnings

Chuck Royce, director of research at a small Wall Street firm, bought Quest Advisory Corporation and gradually assumed management of Royce Pennsylvania Mutual Fund in 1972. It was an opportune time for a young investment manager with a new strategy, in a new area: the small-cap market.

Our philosophy of paying attention to risk in order to preserve wealth grew out of the demoralizing stock market performance of the early '70s, which broke the spirit, if not the bank account, of many investors in small-company stocks.

In those early days of managing Royce Pennsylvania Mutual Fund, we sought to reduce risk by investing in companies with attractive balance sheets, high internal rates of return, and established records of generating "free cash flow"—core characteristics of what we still consider good value.

We were among just a handful of managers willing to invest in non-mainstream, undervalued smaller companies. Conventional wisdom held that only fast-growing small-cap stocks were potentially profitable—those "baby blues" that might some day morph into a Xerox or an IBM.

But the dramatic turn in mid-decade even took us by surprise. Small-caps assumed a market leadership position from 1974 to 1983, a 10-year stretch that remains the longest consecutive period of small-cap outperformance relative to large-cap stocks.

The 1980s: Developing our Discipline

While the 1980s may have passed into our collective memory as a period of conspicuous consumption, merger mania, and booming markets, it’s worth remembering that the decade began with a record high prime rate of 20% followed by the worst recession in 40 years.

As the economy began to recover in 1982, large-caps mounted a furious comeback, signaling the end of small-cap's historic period of outperformance. By the end of 1985, large-company stocks had become more popular than at any time since the early '70s.

But "Black Monday," October 19, 1987, brought an abrupt halt to this bull market. Although the economy and stock market survived the crash, stocks experienced a roller-coaster ride until 1991, plagued by junk bond scandals, the savings & loan crisis, and a recession that began just as the decade ended.

Throughout this trying period of the 1980s, we continued to believe that our small-cap value approach could continue to perform well, even as the small-cap sector ceded its long-held leadership position.

The 1990s: Small-Cap Sector Expands, Micro-Caps Emerge

The '90s were full of dramatic developments and dynamic performance for the small-cap world. The sector grew more popular, and its parameters expanded to include companies with market capitalizations up to $2.0 billion.

As of December 31, 2000, the weighted average market capitalization of the small-cap oriented Russell 2000 index was $1.1 billion, compared to just $140 million as of June 30, 1985. Small-cap stocks were certainly not what they used to be, i.e., they were no longer small, unknown or under-owned.

The sector gained recognition as a professional asset class, with the most significant growth occurring between 1995 and 2000.  Morningstar listed just 31 small-company funds at the end of 1982, compared to 773 by the end of 2000.

Early in this decade, we began to observe that the small-cap market was bifurcating into two distinct sectors. The upper small-cap tier consisting of companies with market caps between $500 million and $2.5 billion, and a lower micro-cap tier comprised of companies with market caps under $500 million.

The upper small-cap tier possesses all the attributes of a professional asset class: a higher level of institutional attention, strong price efficiency, and substantial competition among investors.

The micro-cap asset class closely resembles yesterday's small-cap asset class: a thinly researched, inefficiently priced, somewhat volatile sub-sector that often goes unnoticed by institutional investors, but one that offers substantial opportunities for long-term investors.

2000: The New Millennium

As this decade has progressed, we’ve expanded to include both mid-cap and international stocks. Our embrace of mid-caps was spurred by our experiences with maturing small-caps and our observation that small- and mid-cap companies were behaving more and more alike. Our expanded global reach was spurred early in this decade as we become more involved in foreign companies and work with American businesses that had a substantial global presence.