Commentary

At the heart of every reality show—certainly every successful one—lies a competition. Often, the contest pits people against each other in a situation in which no contestant has any expertise, sometimes partnering them, as on Dancing With The Stars, with someone who does. On Survivor, of course, the formula relies on something like a slightly stage-managed version of Lord of the Flies re-written for a grown-up, though not necessarily mature, cast of characters. The Apprentice has featured earnest young business professionals—and more recently celebrities—competing to impress Donald Trump and in the process learn lessons about The American Way of Doing Business that apparently only Mr. Trump can impart.

Regardless of the format, winning at any cost remains the goal, preferably with a generous dose of backstabbing, betrayal and tears along the path to victory. Having very good-looking participants doesn’t hurt, either, making it somewhat obvious that for many reality TV stars, the real goal is celebrity. A well-received stint on a reality series can mean the beginning (or the resumption) of a career devoted to endeavors that traffic in the more explicitly fictional fare of movies and traditional TV. (And if American Idol has taught us anything, it’s that being eliminated from the contest is no bar to future success. Even if one falls well short of the requisite 15- minute allotment, being famous is often one well-publicized, wildly off-key performance away.)

Of course, there’s nothing new about people willing to publicly embarrass themselves for fun and profit of one sort or another. That element is not what we find interesting in the ongoing popularity of reality TV. What’s intriguing to us is how readily mutual fund management lends itself to reality-TV analogies. Mutual fund performance is often discussed in a similar, short-term, winner-take-all context. The emphasis in many accounts of successful portfolio performance—whether a fund’s own or in the media—sits squarely on the idea of winners and losers, occasionally over a time period no longer than a season’s worth of 22 first-run episodes. ‘Victorious’ portfolio managers are often themselves treated as quasicelebrities in fawning magazine or television profiles.

We’re not immune to the temptations of seeing similarities to our work and the typical reality show. If anything, plunging stock prices have encouraged even more in-house comparisons to what we do and what goes on during a season of Survivor. As patient value investors who believe that we do some of our best work when stock prices are falling, we like that program’s emphasis on making it through adversity. There’s also less glitz and self-congratulation, which we also enjoy.

Yet even in Survivor, there are plenty of elements that do not really fit with our work. For example, we have often made use of “time arbitrage,” in which we look for situations where a company’s declining stock price has been decoupled from its intrinsic value. This is important for us because we seek absolute value in the stocks that we buy, as well as in the performance that we hope to produce. There is no contest for us in these searches. In other words, we are not looking at companies that look good compared to their peers, or that possess financial characteristics that are bigger/better/faster etc. than others in a similar business Potential portfolio selections must survive on their own merits.

The same ethos governs our performance standards. We certainly have no qualms about any of The Royce Funds outperforming either their respective benchmark index or their similarly managed peers. However, our goal is strong absolute performance over full market cycles and other longterm periods. ‘Winning’ the performance ‘battle’ would be wonderful, but our true objective lies elsewhere, where our only opponent is the absolute criteria that we long ago established for ourselves.

Still, we’re all really excited about the return of American Gladiators.