article 10-13-2014

Royce Opportunity Fund: Looking for Success in Turnarounds

Since Buzz Zaino assumed portfolio manager responsibilities in 1998, Royce Opportunity Fund has used a theme-based, opportunistic value approach with a long-term growth of capital investment objective. Today, Buzz is joined by Portfolio Manager Bill Hench, and the Fund enjoys a long-term track record that gives us great pride. 

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The years following the 2008 financial crisis have been challenging for many active managers, but Buzz Zaino and Bill Hench, who manage Royce Opportunity Fund, have mostly been a happy exception to this rule (see the table below for performance through 9/30/14).

Their success—perhaps best exemplified by the Fund's long-term rolling return results—is rooted in a highly disciplined approach that makes use of four investment themes which Buzz began to develop in the 1970s.

Each theme (all of which are variations on turnaround situations) focuses on a catalyst for potential growth in small-cap stocks that Buzz and Bill believe are trading at hefty discounts to their worth as businesses. The result is one of the more singular small-cap approaches available.

Here are the details on Buzz and Bill's four themes: Unrecognized Asset Values are companies that tend to be selling below their probable liquidating value, franchise value, tangible book value, or physical asset value relative to plant or liquid assets. This may come in the form of real estate, a valuable franchise, plentiful cash on the balance sheet, etc. The estimated value of these assets helps to create an attractive discount provided the business also looks likely to recover.

The next theme is Turnarounds. These typically involve new management teams charged with reversing the fortunes of a business that has fallen on hard times, whether due to depressed operating margins, poor management, or more industry-specific factors.

Undervalued Growth companies are those in strong-performing industries that have not participated in the advance. These stocks are often valued with their industry and not necessarily with the business's own progress.

Companies in this category should ultimately be capable of growing at a rate of at least 10-12% while also possessing strong balance sheets and an attractive valuation.

Opportunity has an enviable history of bull-market outperformance while also having relatively higher volatility scores than some of our more risk-averse offerings.

The last of the four themes is Interrupted Earnings, a category Buzz sometimes describes as "broken IPOs." Most companies go public when times are very good.

But over longer business and economic cycles most of these companies will also endure a bad quarter or a difficult year, which naturally disappoints shareholders who have become accustomed to the heady growth.

The criteria here is the potential for either a 20% annual growth rate or a dominant market position, accompanied by a price-earnings multiple substantially lower than the business's anticipated growth rate.

We think the Fund's singular approach has served it well over the years. Buzz assumed portfolio management duties in 1998, and Bill became portfolio manager in 2013 after serving as assistant portfolio manager since 2004.

Opportunity has an enviable history of bull-market outperformance while also having relatively higher volatility scores than some of our more risk-averse offerings.

We are especially pleased with the Fund's record of strong long-term absolute performance and its impressive record of rolling returns—both key performance metrics at Royce. 

We think that Royce Opportunity Fund's singular take on small-cap value investing makes it a viable choice for long-term investors with a reasonable tolerance for risk.

Royce Opportunity Fund [RYPNX]
Average Annual Total Returns as of Quarter-End 9/30/14 (%)

  QTR YTD 1 YR 3 YR 5 YR 10 YR 15 YR SINCE INCEPT. DATE
Opportunity -8.99 -6.24 3.79 24.81 14.61 9.00 12.21 12.82 11/19/1996
Russell 2000 -7.36 -4.41 3.93 21.26 14.29 8.19 7.93 8.09 N/A
Annual Operating Expenses: 1.17%

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 Investment Class as of the Fund's most current prospectus and include management fees, other expenses, and acquired fund fees and expenses. Acquired fund fees and expenses reflect the estimated amount of the fees and expenses incurred indirectly by the Fund through its investments in mutual funds, hedge funds, private equity funds, and other investment companies.

Relative Returns: Monthly Rolling Average Annual Return Periods
15 Years through September 30, 2014

  Periods Beating
the Index (%)
Fund AVG (%)1 Index AVG (%)1
10-Year
61/61
100 9.9 7.1
5-Year
102/121
84 10.4 7.4
3-Year
115/145
79 11.0 7.7
1-Year
117/169
69 15.5 9.7

1 Average of monthly rolling average annual total returns over the specified periods.

Important Disclosure Information

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 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. Russell Investment Group is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Russell® is a trademark of Russell Investment Group. The Russell 2000 is an unmanaged, capitalization-weighted index of domestic small-cap stocks. It measures the performance of the 2,000 smallest publicly traded U.S. companies in the Russell 3000 index. The performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index.

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