article , video 11-24-2015

How Should an Asset Allocator Think About The Royce Funds Today?

Portfolio Manager Steve Lipper talks with Co-CIO Francis Gannon about why an important ingredient in any recipe for asset allocation is measured by one’s view of the economy. This is why in The Royce Funds, we not only emphasize consistency, discipline, and risk awareness in how we operate, but also offer distinctive strategies designed to perform differently in different market environments.

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Francis Gannon: In your previous world, you had done a lot in terms of asset allocation. How should an asset allocator think about the Royce Funds today?

Steve Lipper: Asset allocation involves anticipating a market environment and identifying exposures you want to lean into because you believe it is going to do well in a particular environment, and so across the Royce Funds, while we have consistent disciplines about how we operate, fundamental and bottom-up and research intensive and company focused, the companies – the strategies actually have different exposures.

They have slightly different mixes and, therefore, both have performed in the past, and we would expect in the future would perform differently based on different market environments. So some should do better as the economy accelerates, some will do better if the economy stays in a low growth environment and some have historically and we would expect to do best on a relative basis if the market declines.

Gannon: One of the most common questions I think you get and we get always as a firm is which one of your funds should we invest in. What do you say to clients?

Lipper: So the answer really is it depends, right, is that we have a variety of strategies that we hope do well over a full market cycle but really which have different environments which they will do best in. I think, plausibly, there are three scenarios that we think one of them is the most likely but other two that you couldn’t rule out.

The first is that this correction keeps rolling downhill and we have sort of a major bear market. The second, so the reverse of that, is that where people – this growth scare people are concerned about turns out not to be real at all and actually the economy accelerates and, with that, we probably have rising interest rates. And the third is that things stay as they are. We continue in a low inflation, the period – the type of environment we have been in, low inflation, low interest rate and low growth.

Gannon: Let’s go through each one of those scenarios. If you continue to expect that the market is going to correct and we are going into an economic slowdown, which one of our funds would you be looking at?

Lipper: Two of our funds have consistently throughout their history had a good down market protection and that has been a result of their distinctive strategies. We have a fund Royce Total Return Fund that focuses on dividend-paying small-cap companies and that universe has over many market declines showed superior downside protection, as has that fund, and it has during this most recent decline.

The other one is Charlie Dreifus's Royce Special Equity Fund and that is really due to Charlie’s unique approach around being a very conservative approach to balance sheets as well as accounting as well as valuation and, if you were concerned about a market decline and risk tolerance low among clients, those would probably be the two to take a look at.

Gannon: So let’s look at the opposite of that. Which funds would you look at if you were expecting the economy to expand from here?

Lipper: Yes. So what you want is funds that have exposure to the sectors of the economy that would respond well and so those would be consumer discretionary, technology, industrials and materials. If you take those four together, there are two of our funds that have three-quarters or more of their portfolios in those four sectors. Those are our Royce Small-Cap Value Fund and Royce Opportunity Fund and so, if we do have an economic acceleration and an increase in interest rates, which probably would go with that, those would be the two funds that we might expect to respond best.

Gannon: And then, lastly, if the economy and the market continues to move in the same type of environment we have been in, where would you go?

Lipper: Yes. So what we've been in up until now has been one that has favored growth stocks, which sort of makes sense. If you are in low growth and you are in low inflation and low interest rates, then you tend to value highly growth stocks where you are discounting the earnings way into the future. Our Smaller Companies Growth Fund has done well in that environment. In fact, among all of the Royce Funds, it is among the top performing over the last 3 and 5 years, so that would probably be the one I would look at.

Important Performance and Expense Information

Average Annual Total Returns as of Quarter-End 9/30/15 (%)
  QTR YTD 1YR 3YR 5YR 10YR 20YR SINCE
INCEPT.
DATE
Opportunity -15.50 -14.93 -9.70 8.72 9.10 6.13 N/A 11.49 11/19/96
Small-Cap Value -10.94 -10.03 -7.86 5.83 6.40 6.01 N/A 9.44 06/14/01
Smaller-Companies Growth -11.10 -3.16 3.42 10.38 9.67 6.09 N/A 11.26 06/14/01
Special Equity -11.35 -11.81 -4.23 5.91 8.72 7.37 N/A 8.55 05/01/98
Total Return -9.56 -8.89 -3.90 8.30 9.07 5.90 9.86 10.33 12/15/93
Russell 2000 -11.92 -7.73 1.25 11.02 11.73 6.55 7.95 N/A N/A
Opportunity Annual Operating Expenses: 1.15%
Small-Cap Value Annual Operating Expenses: 1.45%
Smaller-Companies Growth Annual Operating Expenses: Gross 1.34 Net 1.25
Special Equity Annual Operating Expenses: 1.12%
Total Return Annual Operating Expenses: 1.19%

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. Redemption fees are not reflected in the performance shown above; if such fees were reflected, performance would be lower. Current month-end performance may be higher or lower than performance quoted and may be obtained at www.roycefunds.com. All performance and expense information reflect results of the Fund’s Investment Class shares. Gross operating expenses reflect each Fund’s gross total annual operating expenses and include management fees, any 12b-1 distribution and service fees, other expenses, and any applicable acquired fund fees and expenses. Net operating expenses reflect contractual fee waivers and/or expense reimbursements exclusive of any applicable acquired fund fees and expenses. All expense information is reported as of the Fund’s most current prospectus. Royce & Associates has contractually agreed to waive fees and/or reimburse operating expenses through April 30, 2016 to the extent necessary to maintain net annual operating expenses (excluding brokerage commissions, taxes, interest, litigation expenses, acquired fund fees and expenses, and other expenses not borne in the ordinary course of business) to no more than 1.24% for the Investment Class of Royce Smaller-Companies Growth Fund. Acquired fund fees and expenses reflect the estimated amount of the fees and expenses incurred indirectly by any applicable Fund through its investments in mutual funds, hedge funds, private equity funds, and other investment companies. All performance and risk information presented in this material prior to the commencement date of Investment Class shares on 3/15/07 for Royce Small-Cap Value and Smaller-Companies Growth Funds. Service Class shares bear an annual distribution expense that is not borne by the Fund’s Investment Class. 

Important Disclosure Information

The thoughts and opinions expressed in the video are solely those of the persons speaking as of September 28, 2015 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 a company that currently pays 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.)

Royce Special Equity 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.) As of 9/30/15, the Fund invested a significant portion of its assets in a limited number of stocks, which may involve considerably more risk than a more broadly diversified portfolio because a decline in the value of any of these stocks would cause the Fund’s overall value to decline to a greater degree. 

Royce Small-Cap Value Fund invests primarily in small-cap stocks, which may involve considerably more risk than investing in larger-cap stocks. In addition, as of 9/30/15 the Fund invested a significant portion of its assets in a limited number of stocks, which may involve considerably more risk than a more broadly diversified portfolio because a decline in the value of any 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.)

Royce Opportunity 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. 

Royce Smaller-Companies Growth Fund invests primarily in small-cap and mid-cap stocks, which may involve considerably more risk than investing in larger-cap stocks. (Please see "Primary Risks for Fund Investors" in the prospectus.) In addition, as of 9/30/15 the Fund invested a significant portion of its assets in a limited number of stocks, which may involve considerably more risk than a more broadly diversified portfolio because a decline in the value of any of these stocks would cause the Fund’s overall value to decline to a greater degree. 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.)

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. 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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