article , video 06-09-2015

Total Return: Managing Risk by Investing in Dividend-Paying Stocks

Small-cap is an asset class that has historically been associated with increased volatility. We have always believed that dividends, plentiful in the small-cap space, can help mitigate some of that risk. But what are we looking for in the dividend-paying companies in which we invest? Portfolio Manager Jay Kaplan and Co-CIO Francis Gannon discuss.

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Francis Gannon: How should investors think about Royce Total Return Fund?

Jay Kaplan: The name is really important. The Total Return Fund really is about total return—it seeks to provide a lower-risk strategy within the small-cap space.

We're looking to find really high quality, mostly dividend-paying companies that can also grow over time. We think that when you get some cash back along the way, it helps to take out some of the volatility that's generally associated with small-cap investing.

Now there's a tradeoff, of course. In really big bull markets you would expect that the Fund might lag a little bit. In bear markets you would expect that the Fund would do less bad than the market overall. And all of that would be in the context of lower volatility and really good risk-adjusted returns.

So if someone goes onto our website and looks at some of the numbers and some of the math, you would find out that on a risk-adjusted basis we've been able to deliver good risk-adjusted returns.

So for the investor that wants to participate in small-caps but wants to take some of the volatility away, Total Return's a very interesting proposition.

Francis: Obviously very topical this year is interest rates. How would higher rates affect dividend-paying smaller companies?

Jay: There'd probably be a little pressure on some dividend-paying smaller companies if rates went up, but there are some different classes of dividend-paying companies, and maybe it's a good time to explain a little bit more about how we approach Royce Total Return Fund.

Many funds that talk about dividends are out trying to chase the highest yields they can find. We don't do that. If we were going to do that, our portfolio would be loaded with REITs, MLPs, and Utilities. And, in fact, it's not—mostly because those companies are highly leveraged and we try not to invest in highly levered companies.

For us, dividends are important. But it's not high dividends—it's the ability to pay dividends, the ability to pay dividends through cash flow, the ability sometimes to grow dividends over time. But, most importantly, it's the ability for the companies to grow their operating income and compound wealth that way.

So relative to other income-producing equity vehicles, we think Total Return Fund stands a pretty good chance of doing OK when rates finally go up.

Francis: How does that help you manage risk in today's environment?

Jay: I think it helps in a really good way. I think, since we are poised for higher rates, we are ready for the big dividend payers, frankly, to go down. We're not going to face that to the same degree. We're interested in owning businesses rather than stocks, not clipping coupons, and compounding wealth over time.

Royce Total Return Fund [RYTRX]
Average Annual Total Returns as of Quarter-End 3/31/15 (%)

  QTR YTD 1 YR 3 YR 5 YR 10 YR 15 YR 20 YR SINCE INCEPT. DATE
Total Return 1.77 1.77 2.57 12.90 12.12 7.80 10.17 11.32 11.16 12/15/93
Russell 2000 4.32 4.32 8.21 16.27 14.57 8.82 7.19 9.62 9.33 N/A
Annual Operating Expenses: 1.19%

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 30 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.

Important Disclosure Information

The thoughts and opinions expressed in the video are solely those of the persons 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. There can be no assurance that companies that currently pay a dividend will continue to do so in the future.

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 Total Return 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. The Fund may invest up to 25% of its net assets in foreign securities (measured at the time of investment), which may involve political, economic, currency, and other risks not encountered in U.S. investments. (Please see "Investing Foreign Securities" in the prospectus.) 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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