Ten Years for Royce Value Fund and Royce Value Plus Fund

Whitney George and Jay Kaplan

When we introduce new portfolios, we like to think that we are breaking new ground or at least bringing out funds with important differences from our existing line-up. That was certainly the case 10 years ago when we introduced Royce Value Fund and Royce Value Plus Fund. Each portfolio represented something new for The Royce Funds.

Co-managed by Whitney George and Jay Kaplan since 2004, Royce Value Fund debuted as a limited portfolio with the investment goal of long-term growth. Similar to Royce Premier Fund, it would typically hold less than 100 positions in which we held the highest confidence.

The difference was in the new Fund's market capitalization range. Whereas Royce Premier Fund looks to invest in what we deem small-cap—market caps between $500 million and $2.5 billion—Royce Value Fund enjoys a wider purview, able to invest in companies with market caps between $500 million and $5 billion.

Throughout our history, we have kept a fairly close eye on the mid-cap sector, paying particular attention to those successful small-cap companies that outgrew their original asset class and moved up to the mid-cap neighborhood. Our interest became more focused during the '90s as upper-end small-caps began to share more common ground with mid- and large-cap companies.

When that decade closed, we began to think that it made sense to add mid-caps to the mix of certain portfolios, a notion that was the impetus behind the creation of Royce Value Fund. The Fund's selection criteria is familiar Royce territory—we seek companies with strong balance sheets, high returns on invested capital and the ability to generate free cash flow that are also trading well below our estimate of their worth as a business.

Those same changes in the small-cap universe as a whole also inspired the thinking behind Royce Value Plus Fund, which invests in companies with market caps up to $5 billion, a universe that encompasses micro-cap (market caps up to $500 million), small-cap and mid-cap stocks. However, the 'Plus' in the Fund's name does not exclusively refer to the relatively wide-ranging equity universe from which it can make its selections. It has to do with our search for companies with strong growth prospects.

This does not mean that the Fund's selection criteria are less exacting than those of our other portfolios. In selecting securities, Chip Skinner, who co-managed the Fund between 2002 and 2007 and has been the Fund's primary portfolio manager since 2008, and Co-CIO Whitney George, who serves as assistant portfolio manager, place emphasis on strong balance sheets, an established history of earnings and free cash flow as well as on growth potential.

We think that this 'value plus growth' approach makes the Fund somewhat unique. Most value investors are not as concerned with growth, while most growth strategies do not place as much scrutiny on valuation.

"We're happy to see these relative youngsters in our portfolio line-up off to such a strong start in their first decade," said Whitney George, "and we look forward to many more years of success." Please join us in celebrating the Funds' 10-year anniversaries.