article 10-09-2014

Stars are great; a process is better.

The recent, well-publicized departure of a well-known bond fund manager got us thinking about the way portfolio managers are viewed, especially at a time when the value of active equity fund management is repeatedly being questioned.

Indeed, many observers used the exit of this well-known bond fund manager to tell the rest of us that the era of superstar portfolio managers is over. These comments left us a bit puzzled—mostly because from our perspective, it never really started.

This is not to suggest that there have been no highly successful, market-beating managers—far from it. What it does mean is that we go about our daily business with the knowledge that no manager—regardless of track record, accolades, or media mentions—is perfect.

Even the best will have bad years, whether in the form of negative returns, underperformance versus a benchmark, or both. It has always seemed to us that the asset management business is as humbling as it is rewarding. This is true on many levels, perhaps most notably the intellectual.

At Royce, we emphasize teamwork, communication, and the wide sharing of ideas. While we are very proud of our managers who have amassed impressive records on an absolute and relative basis, we are under no illusions that today's "star" can be tomorrow's underperformer—and vice versa. What the market gives, it can just as quickly and easily take away.

For us, then, our disciplined investment processes, most of which emphasize bottom-up stock picking, close attention to risk, and understanding fundamentals, are equally as important as having the right people to execute them.

Both must be present for a portfolio to enjoy long-term success. No one is more important than these processes.

Our work takes the efforts of a team. The daily dialogues that go on in our office are designed to test hypotheses and refine ideas. This is one reason why most of our portfolios include more than one manager.

It's also important to note that the sharing goes beyond specific portfolio management assignments—ideas for a particular portfolio can come from anyone regardless of whether or not they have an official role on a portfolio.

So while one name graces the doors of our offices, the seats are filled with a number of talented individuals who are hungry for success. If there are stars here at Royce, they are our disciplined investment approaches.

Important Disclosure Information

Francis Gannon is Co-Chief Investment Officer and Managing Director of Royce & Associates, LLC, investment adviser to The Royce Funds. Mr. Gannon's thoughts and opinions expressed in this piece 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. 



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