article , video 11-08-2016

Is Now The Time For A Deep Value Strategy?

Portfolio Manager Bill Hench on 2016 performance for his deep value strategy.  

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Our performance in the current year is really influenced by what we did in the prior years. So, in this case, last year we had a fair amount of names that were disappointing. And if you look at the Russell 2000 in general, most of the names didn't have a great year.

But what we tend to do in those bad years is really accumulate positions or stocks that we like at very, very good prices so that when the things that need to happen for them to work, whether that be a management change or just a change in their environment or a change in the sector, when those things happen, we tend to get paid in that following year.

And that's where we are right now. You've got a lot of companies really executing against a plan that they developed over the last year and a half, two years. You've got an economy that's helping us, a little bit on the top-line, but mostly its companies just benefiting from better margins.

Turnarounds and Broken IPOs

About a third of the portfolio at any given time is made up of what we'd call turnarounds. Many of those are new managements on an existing base of business. And if you look throughout the portfolio, some of the best names that we've had, things like Spartan Motors, where a new management has come in and really sort of taken a look at how their operations could be improved, and they're executing on that plan, so that stock has done very well.

We've also had a fairly large amount of IPOs that we bought post their introduction into the public markets where they may have fallen on some hard times in the short term, but where we thought that could be turned around in a pretty quick manner. And we've had some excellent winners there as well, like Amber Road, A10 Networks and Aerohive have all contributed.

Important Disclosure Information

The thoughts and opinions expressed in the video are solely those of the persons speaking as of October 13, 2016 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.

As of 9/30/16, Spartan Motors was 0.7% of Royce Opportunity Fund's assets, 0.0% of Royce Low-Priced Stock Fund's assets, and 2.1% of Royce Micro-Cap Opportunity Fund's assets.

As of 9/30/16, Amber Road was 0.2% of Royce Opportunity Fund's assets, 0.6% of Royce Low-Priced Stock Fund's assets, and 2.6% of Royce Micro-Cap Opportunity Fund's assets.

As of 9/30/16, A10 Networks was 0.4% of Royce Opportunity Fund's assets, 0.0% of Royce Low-Priced Stock Fund's assets, and 0.5% of Royce Micro-Cap Opportunity Fund's assets.

As of 9/30/16, Aerohive Networks was 0.0% of Royce Opportunity Fund's assets, 0.0% of Royce Low-Priced Stock Fund's assets, and 1.0% of Royce Micro-Cap Opportunity Fund's assets.

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.

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. Smaller-cap stocks may involve considerably more risk than larger-cap stocks. (Please see "Primary Risks for Fund Investors" in the prospectus.)

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