article 02-13-2015

The recovery in U.S. manufacturing is creating attractive investment opportunities, especially in the small-cap space.

Measured by its share of GDP, domestic manufacturing had been in a long-term secular decline, one that lasted for decades. The last several years have seen a reversal of the trend, a remarkable reversal, in fact, which is often referred to as "The U.S. Manufacturing Renaissance." 

This revival is being driven by several factors, including the shale oil revolution here in the U.S., which has dramatically increased our energy supply while lowering costs, as well as significant increases in labor costs in emerging markets such as China.

What interests us more specifically as small-cap investors is the effect this recovery has had on businesses within our chosen asset class. The renaissance has led many companies—indeed entire industries, such as chemicals and steel—to make important changes that have benefited smaller firms.

After having seen the inherent risks in a globally stretched supply chain, companies have opted to re-shore their manufacturing here in the U.S.  This includes global behemoths such as Dow, Nucor, Boeing, BMW, and Mercedes Benz, all of which have opened or expanded plants in the U.S. over the last several years. This has created a considerable ripple effect on smaller companies that make up the supply chains of larger companies. And it is in many of these smaller companies that Royce has been finding attractive investment opportunities.

While following our regular due diligence process, I recently visited the operations of several holdings that have been favorably affected by the Manufacturing Renaissance. I toured a manufacturing plant of Lydall in Yadkinville, NC that makes specialty acoustical and thermal barriers used in the automotive industry. A money-losing operation four years ago, this facility has been transformed into a highly profitable plant that's helping the company win market share with some of the large automotive OEMs (original equipment manufacturers). 

I also visited Horsehead Holding's recently commissioned state-of-the-art zinc reclamation facility in Mooresboro, NC. This facility required four years to plan and construct at a cost of nearly half a billion dollars.

These innovative smaller companies are just a few of the beneficiaries of a Manufacturing Renaissance that we believe will continue.

Important Disclosure Information

Brendan Hartman is a Portfolio Manager of Royce & Associates, LLC, investment adviser to The Royce Funds. He is assistant portfolio manager for Royce Micro-Cap Fund (RMC) and Royce Capital Fund – Micro-Cap Portfolio (RCM). The thoughts and opinions expressed in this piece 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 stocks may involve considerably more risk than investments in securities of larger-cap stocks. (Please see "Primary Risks for Fund Investors" in the prospectus.)

Percentage of Fund Holdings as of 12/31/14 (%)

Lydall 0.00 0.00
Horsehead Holding Corporation 0.78 0.77

There can be no assurance that any of the securities mentioned in this piece 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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