article , video 09-17-2014

Bullish on Japanese Small-Caps

While the macroeconomic picture in Japan is unsettling for many investors, we are finding what we think are inexpensive high-quality businesses across many industries. Royce International Smaller-Companies Fund Portfolio Manager and Director of International Research David Nadel talks about how he is positioning his portfolio and explains why he has confidence in FamilyMart, a Japanese convenience store chain. 


Francis Gannon: How are you thinking about Japan today and positioning it in the International Smaller-Companies Fund?

David Nadel: We're pretty bullish on Japan, actually, which is not a consensus view. It is the number one country weighting in the portfolio—about 16% of Royce International Smaller-Companies Fund is Japanese companies.

Japan was 50% of global market capitalization in 1989. It's about 8% of global market capitalization now. There has been a rally for two years that's kind of petered out in the last six months or so, and I think very few people really wanted to believe that rally. So we're just finding a lot of very high-quality businesses. Return on invested capital is increasingly a priority of the better-managed businesses.

The reputation of Japan had always been that the companies were not managed for profits and that the minority shareholder was sort of just along for the ride, and often not really getting a great deal. And that's changing.

I also think from a macroeconomic level the picture in Japan is much more encouraging than what you'll typically see in the papers. They also have the world's second-largest foreign currency reserves.

Francis: Let's go a little bit more micro, though, in Japan—where you're finding opportunities, and themes, and sectors, and how were you positioning that 16% of the overall portfolio in the Fund.

David: Japan is a market that has, for equity investors, a great deal of breadth and depth. So we have holdings across industries. We've tended to shy away from businesses that are purely dependent on the Japanese consumer and have been more attracted to companies that are a play on pan-Asian growth.

One of our largest holdings in the Royce International Smaller-Companies Fund is a company called FamilyMart. FamilyMart runs convenience stores. They have a network of 17,000 convenience stores across Asia. About 60% of their store base is outside of Japan, but it's only about 10% of their net income, so the future is the ex-Japan business. So that's an example of something that is giving us consumer exposure, but again being a play on pan-Asian growth and using Japan as sort of the cash-cow funding mechanism for their expansion.

Important Disclosure Information

David Nadel is Director of International Research and a Portfolio Manager of Royce & Associates, LLC, investment adviser to The Royce Funds. He is the portfolio manager of Royce International Smaller-Companies Fund (RIS), Royce European Smaller-Companies Fund (RES), and Royce International Premier Fund (RIP). He also assists on Royce Global Value Fund (RGV), Royce Global Dividend Value Fund (RGD), Royce International Micro-Cap Fund (RMI), Royce Global Value Trust (RGT), and Royce Value Trust (RVT). The thoughts and opinions expressed in the video are solely those of the person speaking as of July 26, 2014 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 International Smaller-Companies Fund may invest a significant portion of its assets in foreign companies, which may be subject to different risks than investments in securities of U.S. companies, including adverse political, social, economic, or other developments that are unique to a particular country or region. (Please see "Investing in Foreign Securities" in the prospectus.) Therefore, the prices of the securities of foreign companies in particular countries or regions may, at times, move in a different direction than those of the securities of U.S. companies. (Please see "Primary Risks for Fund Investors" in the prospectus.) In addition, as of 6/30/14 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. The Fund invests primarily in small-cap and/or 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.)

Percentage of Net Assets as of 6/30/14 (%)

Securities headquartered in RIS RES RIP RGV RGD RMI RGT RVT
Japan 15.4 0.00 5.6 11.7 5.6 17.7 10.6 0.6

Percentage of Fund Holdings as of 6/30/14 (%)

FamilyMart 1.14 0.00 1.65 0.92 0.00 0.00 0.98 0.11

There can be no assurance that any of these securities mentioned in this interview 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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