article , video 06-18-2014

Royce Small-Cap Value Fund's Investment Strategy

Portfolio Manager Jay Kaplan and Co-Chief Investment Officer Francis Gannon detail how Jay has been positioning Royce Small-Cap Value Fund's portfolio, why Jay has been reducing the number of names, where he is currently finding bargains, and more.


Francis Gannon: Let's talk about the Small-Cap Value Fund (formerly Royce Value Fund). Performance has been quite strong over the past year. Some of the biggest changes have been your taking the Consumer Discretionary area up in the portfolio and bringing the Materials area down in the portfolio. Can you talk about that and your decisions there?

Jay Kaplan: Well, the Materials area was never really a business that I'd fallen in love with, so we exited some of those. And then we went to look for what was on sale in the market, where's the opportunity, and what we found was that the consumer sector was then, and even a year later still is, to a great degree, completely discounted by the market.

The market believes that people will never shop again. Totally not true. Christmas season of 2013 wasn't great, and that's OK. I mean the companies that we're invested in, even though Christmas was tough, they were all very profitable, had nice returns in their businesses, and, again, once things get better and earnings go up, they'll get higher valuations.

Francis: Is there a return profile you look for consistently?

Jay: We're looking for double-digit returns on capital. We're looking for high single-digit returns on assets, and we're looking for companies that are self-funding, companies that generate free cash flow, companies that, absent large projects or deals, don't need to access the capital markets. So when there's a capital market event like there was in late '08/early '09, our companies aren't in danger of running out of money.

Francis: One of the other things you've done in the Fund over the past year is cut the number of names. Take us through your thought process there.

Jay: I'm not sure it was an overt thought process to take the number of names down. After I sold some of the names that I didn't like and added some names that I liked, given where the market was, given the valuation of the market, there weren't a lot of bargains.

We try to be thoughtful about where we put investors' money and try to do things that we think are going to be smart, and we don't invest for the sake of investing. So the number of interesting ideas, it's fewer today, and that's OK.

So we're running a little more concentrated than we would normally be. When market conditions allow, and when there are more things to buy, we'll probably take the number of names back up again, but for now it's served us OK.

Francis: And tell us about the positioning of the Fund.

Jay: It's pretty heavily consumer. There's a pretty good energy bet, and there's a pretty good slug of technology stocks as well. Some people think that value investors don't do technology. Technology comes in a lot of flavors, so we do a lot of that as well.  

There are a lot of 3% positions in the Fund, so it's kind of concentrated for Royce. We have somewhere between 50 and 60 names in the current environment.

Francis: We spent a little time on Consumer Discretionary. Talk about some of the industry themes you might be seeing in technology.

Jay: It's all over the place. There's technology semiconductor capital equipment.  There are services. We own a call center business. It's not a high-tech company, but it's low technology. We do companies that are in the military supply business and military IT. So it's defense oriented, but it also has a technology component. So it's more than just chips, bits, and bytes.

Francis: How should investors think about the Small-Cap Value Fund?

Jay: Well, I think the first thing to think about is it's a three- to five-year endeavor for anyone who decides to join us in the Small-Cap Value Fund. I'm a big shareholder of the Small-Cap Value Fund and everything we do is very long term. And they should think about it as a portfolio of quality businesses, and they should think of themselves as business owners.

Royce Small-Cap Value Fund [RYVFX]
Average Annual Total Returns as of Quarter-End 3/31/14 (%)

Small-Cap Value 1.04 1.04 25.22 5.97 20.33 10.18 N/A N/A 11.61 6/14/2001
Russell 2000 1.12 1.12 24.90 13.18 24.31 8.53 8.91 9.48 8.39 N/A
Annual Operating Expenses: 1.48%

Important Performance and Expense Information

All performance information reflects past performance, is presented on a total return basis, reflects the reinvestment of distributions, and does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate, so that shares may be worth more or less than their original cost when redeemed. Shares redeemed within 180 days of purchase may be subject to a 1% redemption fee, payable to the Fund, which is not reflected in the performance shown above; if it were, performance would be lower. Current month-end performance may be higher or lower than performance quoted and may be obtained here. Operating expenses reflect the Fund's total annual operating expenses for the Service Class as of the Fund's most current prospectus and include management fees, 12-b-1 distribution and service fees, and other expenses.

Important Disclosure Information

The thoughts and opinions expressed in the video are solely those of the person speaking 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. The Fund invests primarily in small- cap and mid-cap stocks, which may involve considerably more risk than investing in larger-cap stocks. In addition, as of 3/31/14 the Fund held a limited number of stocks, which may involve considerably more risk than a less concentrated portfolio because a decline in the value of any one of these stocks would cause the Fund's overall value to decline to a greater degree. (Please see "Primary Risks for Fund Investors" in the prospectus.) The Fund may invest up to 25% of its net assets (measured at the time of investment) in securities of companies headquartered in foreign countries, which may involve political, economic, currency, and other risks not encountered in U.S. investments. (Please see "Investing in Foreign Securities" in the prospectus.)



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