article , video 09-22-2015

Royce Premier Fund: Looking for Enduring Franchises

Royce Premier Fund seeks quality-oriented companies, those with a proven ability to compound wealth over long periods of time, structural advantages within their industry, and high, consistently strong returns on invested capital.

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Steven McBoyle: In Royce Premier Fund, we're looking for franchise companies. These are businesses that, over long periods of time, have exhibited the ability to compound wealth. We spend a lot of time looking at the qualitative market map, having an appreciation for the structural advantages that that company may have within a given industry that will allow it to compound over time.

We see this, empirically, through high returns on invested capital. But, again, it's one thing to identify that—we need to have the ability to build conviction around the ability for that company to continue that return profile.

Lauren Romeo: A recent addition to the Premier portfolio is a company called TGS-NOPEC, which is a provider of seismic data to energy companies that are doing exploration for oil and gas offshore. Seismic data is critical to E&P companies as they constantly need to replenish their reserves. TGS-NOPEC has been doing seismic surveys for decades, and as a result it's built up an extensive seismic data library that is really a competitive advantage for the company.

TGS-NOPEC has several characteristics that we like in Premier companies, including an asset-light business model and a variable cost structure. Unlike most of its competitors, TGS-NOPEC does not own the vessels that go out and shoot the seismic data. As a result, the company is able to maintain high operating profit margins even in down periods for the industry.

TGS-NOPEC is a great example of how companies find their way into the Premier Fund. It's a name that we've owned in other Royce Funds for many years, so we're very familiar with that company and have lived with management through different cycles. We knew it was a company that we wanted to own when the price of oil fell 50% in the back half of last year that had a severely negative impact on oil services companies. As a result, TGS's market cap came back into the buyable range for the Premier Fund and, as a result, we were ready and able to take advantage of that opportunity.

Steven: Recently we added Dorman Products. We've known this company at Royce for many years. Dorman Products is the dominant new-to-aftermarket dealer-only auto parts provider. Its unique structural advantage lies in its market intelligence as it relates to the failure rate of auto parts.

Specifically, the data collection and the database that it's amassed over time is really quite unique in the industry—no one has been able to replicate it. In addition to that, Dorman benefits from the fact that it is an asset-light production model. So margins are actually industry leading, close to 20% pretax. Return on invested capital is greater than 20%.

We also like the fact that Dorman management owns greater than 10% of the stock and the fact that the balance sheet is debt free. So Dorman, in our classic sense and definition of a Premier company, is a wonderful business moat. It has had the ability to compound over many years, and we believe that will continue.

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.

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 Premier Fund invests primarily in small-cap stocks, which may involve considerably more risk than investing in larger-cap stocks. The Fund also generally invests a significant portion of its assets in a limited number of stocks, which may involve considerably more risk than more broadly diversified portfolio because a decline in the value of any one of these stocks would cause the Fund's overall value to decline to a greater degree. (Please see "Primary Risks for Fund Investors" in the prospectus.) 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 in Foreign Securities" in the prospectus.)

Percentage of Fund Holdings as of 6/30/15 (%)

  TGS-NOPEC Geophysical Dorman Products
Premier 1.15 0.79

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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