David Nadel on the Effects of Geopolitics, Brexit, and Tariffs
article , video 06-13-2018

David Nadel on the Effects of Geopolitics, Brexit, and Tariffs

PM David Nadel talks about the effects of Brexit, tariffs, and how a U.K. headquartered company gives him exposure to Russia.


How has Brexit affected Royce International Premier Fund’s portfolio?

Brexit has been a big headline grabber, and it’s been something that we’ve been paying attention to obviously for quite a while. It’s created both challenges and opportunities for us.

But what we’ve seen over time is that we’ve benefited from our holdings in the U.K. being bought out by acquirers. The typical pattern is a U.S. acquirer.

This is a part of a bigger picture in terms of volatility in the markets that we actually like in a way. It doesn’t feel great when it happens, but in retrospect, those moments of volatility are where you’re able to build positions bigger or start new positions that otherwise would be too expensive.

Do you think investors overemphasize a company’s headquarters as opposed to its business?

I think in the small-cap space, a lot of investors do overemphasize the importance of headquarters relative to the business mix. The stereotype of small-cap companies is that they are, you know, single-country businesses. So if they’re a U.K. company, they must sell to U.K. consumers. 

Our style of investing in Royce International Premier is pretty far from that paradigm. One of our holdings in the U.K. has a 98% export ratio. So 98% of their sales coming from outside the U.K., that is more typical of our type of holdings.

The fact that they’re domiciled in whatever country you want to name doesn’t mean that’s where their business mix is coming from.

Are you concerned about the potentially negative effect of tariffs and trade wars?

Tariffs and trade wars have been very much headline grabbing as well over the last several months. We have not seen a whole lot of impact to our portfolio and to the operating performance of our companies.

If you think about the type of businesses that get caught in the crosshairs of tariffs and trade wars, they tend to fall into two big buckets. One is commodities. So, you know, steel, aluminum, soybeans. Another is kind of high-profile consumer brands, where it’s going to hurt to have these things slapped with tariffs. So you know, Harley Davidson motorcycles, or Levi Strauss jeans.

We don’t invest in commodity companies in the International Premier Fund, so we’re not exposed there. And we’re not really investing in those high-profile consumer brands. So I don’t think it’s the type of thing that really impacts our way of investing that much.

How do you view the Russian market?

Investing in Russia is a little bit of a quandary. On the one hand it’s a very appealing market from a top down perspective. It’s the biggest market in greater Europe, at least by population. It’s growing, the economy’s actually doing pretty well. It’s not indebted. Their debt levels both at a consumer level and at a government level are, you know, a fraction of what they are here. So that seems appealing.

The challenge with Russia is corporate governance, shareholders’ rights. So we really haven’t made direct investments in Russia.

Doesn’t mean we’re not exposed to the market at all. We just like to buy Western companies that have, you know, world-class corporate governance, strong market position, but also, you know, a good sort of shareholders’ rights angle as well.

For example, we’re invested in a U.K. company called ITE. ITE runs conventions in Russia and other markets. And among the conventions that they run is the annual oil and gas conference in Moscow. So this is, you know, it’s less than a quarter of their revenues, but it does give you direct exposure to this market, and it’s a very attractive business. Very asset light. They don’t own the convention centers. So it’s a very cash generative business.

But again, you’re getting that U.K. management team that’s known the Russian markets for a long time without having to deal with sort of risk of expropriation or the various things that can happen in the Russian market directly.

I think it is another example where you, you know, there’s a difference between source of revenue and, and country of origin, right? Because ITE, obviously a U.K. company, has very little business in the U.K. and yet it’s a small-cap.

Important Disclosure Information

Average Annual Total Returns as of 3/31/18 (%) 

International Premier 0.32 28.27 15.25 10.97 8.44 12/31/10
Russell Glo x US SC -0.34 19.33 9.82 7.79 5.74 N/A

Annual Operating Expenses: Gross 1.65% Net 1.44% 

1 Not annualized.

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 2% 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 at www.roycefunds.com. Gross operating expenses reflect the Fund's total gross annual operating expenses for the Service Class and include management fees, 12b-1 distribution and service fees, and other expenses. Net operating expenses reflect contractual fee waivers and/or expense reimbursements. All expense information is reported as of the Fund's most current prospectus.

Percentage of Fund Holdings as of 3/31/18

  ITE Group
International Premier 1.66

Company examples are for illustrative purposes only. This does not constitute a recommendation to buy or sell any stock. There can be no assurance that the securities mentioned in this piece will be included in any Fund’s portfolio in the future.

Important Disclosure Information

The thoughts and opinions expressed in the video are solely those of the persons speaking as of April 9, 2018 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. Past performance is no guarantee of future results. Company examples are for illustrative purposes only. This does not constitute a recommendation to buy or sell any stock. There can be no assurance that the securities mentioned in this piece will be included in any Fund’s portfolio in the future.

The performance data and trends outlined in this presentation are presented for illustrative purposes only. All performance information is presented on a total return basis and reflects the reinvestment of distributions. Past performance is no guarantee of future results. Historical market trends are not necessarily indicative of future market movements.

Frank Russell Company (“Russell”) is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company. Neither Russell nor its licensors accept any liability for any errors or omissions in the Russell Indexes and / or Russell ratings or underlying data and no party may rely on any Russell Indexes and / or Russell ratings and / or underlying data contained in this communication. No further distribution of Russell Data is permitted without Russell’s express written consent. Russell does not promote, sponsor or endorse the content of this communication. The Russell 2000 Index 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 Russell Global ex-U.S. Small Cap Index is an index of global small-cap stocks, excluding the United States. The performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index.

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