article 04-07-2014

Chip Skinner on 1Q14: Looking at Current Long-Term Growth Plays

Portfolio Manager and Principal Chip Skinner talks about the market's more volatile behavior in the first quarter, potential growth areas that he finds interesting, ideas in which he has high confidence, and one stock that has recently done well for him.


What did you make of the market's more volatile behavior in the first quarter?

I attribute it to a number of things. First, the market was coming off not just a big year in 2013, but also off the longer bull market that began in March 2009. I've always thought that a healthy bull market is not one that goes up in a straight line, but one that has a few pullbacks such as what we saw at times in the first quarter.

There was also a lot of uncertainty. Globally, we had the situation with Russia and Ukraine and ongoing concerns about the safety and stability of China's banks. Here at home, there were questions about whether or not Fed Chair Janet Yellen would continue the same stimulus and zero interest-rate polices as her predecessor and about what effects higher healthcare costs might have for many businesses. We also had some terrible winter weather. I don't think any of these things mean an end to the bull market. I expect consumer spending to keep gaining momentum and for the economy to continue to improve.

What potential growth areas are most interesting to you these days?

I'm still pretty bullish on "Machine to Machine" (M2M) technology, also known as the "Internet of Things," which I've discussed before. More recently, I've also been exploring opportunities around a recovery in non-residential construction. Much of the activity in the industry over the last couple of years has come from the renovation and replacement areas, but there's been a pick-up in order activity on the new construction side as well. It hasn't really hit the income statements of these businesses yet, but I'm confident going forward, especially in those companies that I hold in Royce Smaller-Companies Growth Fund's (formerly Royce Value Plus Fund) portfolio that have held their own in a tough down cycle for their industry.

Battery and power storage is another area that's very interesting to me, one that I think has great long-term growth potential. Increasingly, both companies and individuals are showing interest in distributed power and alternative energy sources, such as solar, wind, and high-capacity batteries. This is already happening in Germany, where in some instances, power from utilities is being used more as a supplement or back-up. I think this is likely to be the trend going forward. Lead-acid and lithium battery makers are at the forefront of much of this technology, particularly in the electric vehicle business, which I see as another potentially high-growth area.

I've always thought that a healthy bull market is not one that goes up in a straight line, but one that has a few pullbacks such as what we saw at times in the first quarter.

Can you talk about an idea that has not yet worked out in which your confidence remains high?

I think Rockwood Holdings is a good example of a company in the battery and power storage business with really promising prospects. Rockwood makes specialty surface treatment chemicals. It's also a major producer of lithium and lithium compounds used in lithium-ion batteries. This battery business has several industrial end users, but is particularly compelling in the development of electronic vehicle (EV) batteries. In fact, the surface treatment business has dominated revenues of late, but the lithium business has been driving the company's EBIT, which is a trend that seems likely to continue. The company is involved in a joint venture, which was announced in December and is still awaiting regulatory approval, with a Chinese company that will position Rockwood to capture approximately half of the globe's lithium supply. We've been building a position in Smaller-Companies Growth for the last nine months. The stock has done all right over the last year, but hasn't taken off in the way I think it can once the potential for its lithium business is better understood.

Can you discuss one stock that's done well for you recently and why it initially appealed to you?

After finishing 2013 as the largest detractor in Smaller-Companies Growth, I've been very happy to see Myriad Genetics rebound nicely in 2014. Myriad is a molecular diagnostic company that specializes in genetic testing for cancer. It received a mixed ruling from a Supreme Court decision in June 2013 when the Court decided that human genes can't be patented and the company then suffered another blow later in the year when the federal government proposed a cut of almost 50% to Medicare's reimbursement rate for its breast cancer diagnostic test. Its fortunes began to reverse when the government announced a much higher reimbursement rate than investors were expecting in early April. Myriad still holds patents on certain genetic testing processes and the quality of its predictive tests remains the industry's gold standard. I also like its existing and emergent pipeline of new products and services, so this remains a long-term growth play for the portfolio.

Important Disclosure Information

Chip Skinner is a portfolio manager and principal of Royce & Associates, LLC, investment adviser to The Royce Funds. He is the portfolio manager of Royce Smaller-Companies Growth Fund (RVP) and an assistant portfolio manager of Royce Low-Priced Stock Fund (RLP). The thoughts and opinions expressed in the interview are solely his own and may differ from those of other Royce investment professionals, or the firm as a whole. There can be no assurance with regard to future market movements.

This material is not authorized for distribution unless preceded or accompanied by a current prospectus. Please read the prospectus carefully before investing or sending money. Royce Smaller-Companies Growth Fund invests primarily in micro-cap, small-cap, and mid-cap stocks, which may involve considerably more risk than investing in larger-cap stocks. (Please see "Primary Risks for Fund Investors" in the prospectus.) The Fund's broadly diversified portfolio does not ensure a profit or guarantee against loss. The Fund may invest up to 25% of its net assets in foreign securities, which may involve political, economic, currency, and other risks not encountered in U.S. investments. (Please see "Investing in Foreign Securities" in the prospectus.)

Percentage of Fund Holdings as of 3/31/14 (%)

Rockwood Holdings 1.77 0.00
Myriad Genetics 1.58 1.88

There can be no assurance that any of the securities mentioned in this piece will be included in these portfolios in the future. References to specific securities in this piece are not intended as recommendations and should not be relied upon as the basis for anyone to buy, sell, or hold any security.



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