Commentary

Steven McBoyle

Stuck in the Middle With Royce

As avid readers of our site know, Steven McBoyle joined the firm this past June. He is a Portfolio Manager and Senior Analyst for Royce & Associates, LLC, investment adviser for The Royce Funds, and co-manages Royce Mid-Cap Value Fund (RMVSX) and Royce Mid-Cap Select Fund (RMISX) with Chuck Royce. Steven acquired his expertise in the mid-cap stock area with positions at Lord Abbett (2001-7) and Morgan Stanley (2000-1). Like Charlie Dreifus, Steven also has an accounting background. He is a CPA and also a Chartered Accountant, with a degree from the Institute of Chartered Accountants of Ontario, Canada.

On the Road to Mid-Cap

Steven's arrival roughly coincides with Royce broadening our commitment to mid-cap stocks, which we define as those companies with market caps between $2.5 billion and $10 billion.

As Small-Cap Companies Matured

Our early forays into the mid-cap area began with our observation in the early '90s that many small-cap stocks were 'growing up'— that is, trading volumes were growing and spreads between bid and ask were shrinking. This change took place in the upper reaches of the smaller company universe, or rather near the line that separates small-cap stocks from their mid-cap peers. As small-cap stocks matured, many of these companies began to look increasingly similar in our eyes to mid-cap stocks. This led us to investigate this mid-cap area more thoroughly. We had previous experience with mid-cap companies, mostly, as it were, by default.

While our practice is to set trigger prices on the up and down side whenever we purchase a stock, we also regularly re-evaluate our portfolio holdings. Over the years, there have been instances in which a small-cap company has migrated into mid-cap territory. When the business fundamentals remain strong and the company's prospects continue to look promising, we typically choose to hold (or occasionally build, if permitted by prospectus) the position.

Thus, our progress toward mid-caps comes from a confluence of two factors—our experiences with maturing small-caps and our observation that small- and mid-cap companies were behaving more and more alike.

With the 2001 launch of two new mid-cap oriented funds, Royce Value Fund (RYVFX) and Royce Value Plus Fund (RYVPX), it was official.

Portfolio Manager Steven McBoyle Joins Royce

Arriving at Royce as an experienced portfolio manager and analyst of small- and mid-cap securities, Steven had time to develop his own take on the dynamic between small- and mid-cap equities, which was fortuitously close to our own. He believes that the progression from small- to mid-cap companies is natural and is based on two factors: First, as small-cap stocks mature, it does not make sense to sell successful companies that continue to support one's original investment thesis simply because they have become larger. Second, the investment process that is applied to small-cap can be easily—and, he hopes, successfully—replicated with mid-caps. That is, the business dynamics and knowledge of companies that apply to small-cap stocks—be it industry and competitive dynamics, new technological developments, secular changes within a given industry, etc.—similarly apply to mid-cap companies.

The challenges of finding what Steven believes is compelling value in the more efficient small- and mid-cap world is not a significant issue for him, as he has always been drawn to those mid-cap companies where compelling inefficiencies can be found. This of course often requires a contrarian view in any particular investment decision. In that sense, his approach makes him a terrific fit as a valued member of our investment staff.

Vintage Royce

Both Royce Mid-Cap Value Fund (RMVSX) and Royce Mid-Cap Select Fund (RMISX) focus primarily on mid-cap stocks. The investment criteria for the Funds is vintage Royce.  We focus on companies that have high internal rates of return, above average prospects and the ability to generate free cash flow.  The investment approach is to focus on those mid-cap companies that possess above-average rates of growth and returns at below-market multiples.