article , video 11-24-2014

Portfolio Replenishing During Bull Markets

Royce Opportunity Select and Opportunity Fund Portfolio Manager Bill Hench talks with Principal Dave Gruber about his buying and selling process, which—while more difficult to maintain during up-market periods—remains consistent regardless of market movements. 

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Dave Gruber: The past five years have seen very strong returns, especially for small-cap equities. How do you reposition the portfolio after such a strong five-year period?

Bill Hench: For the past five years, performance was helped greatly by the fact that you had the disaster of '08 and '09, right? So prices had become very depressed. A lot of the appreciation in the initial recovery was just a lack of selling or an abatement of just massive selling pressure.

But things have gotten better, the economy has improved, and, as you said, it is difficult to maintain that over a very long time. So what do we need to do? We need to replenish the portfolio.

As is always the case, the stocks that have done well are replaced with ones that we hope will do well a year and a half to two years from now. So there is quite a bit of work replacing the names, and the way we do it is one by one. So those things that look like they are fully valued, or near fully valued, will be reduced, and we'll replace them simply with new names that have very low valuations.

Dave: What are areas, sectors, industries that you're seeing opportunities right now in the market?

Bill: So if you look at where we are at the halfway point of the year, about half of the stocks are performing less than average, which is to say they're underperforming. We think that's probably the best place to look. A lot of the retail names, a lot of non-residential construction, and a lot of the technology names really represent good value to us.

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. Investments in securities of small-cap companies may involve considerably more risk than investments in securities of larger-cap companies. (Please see "Primary Risks for Fund Investors" in the prospectus.)

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