Bill Hench on Updates and Opportunities For Royce’s Deep Value Strategy
article , video 11-09-2018

Bill Hench on Updates and Opportunities For Royce’s Deep Value Strategy

Bill Hench on additions to our Deep Value team, his view of the small-cap market, and where he’s been finding opportunities.

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Can you discuss the recent changes to the team?

We are delighted to add Suzanne Franks and Rob Kosowsky to the team, both as assistant portfolio managers. Many of you know Rob from his work with the Micro-Cap team. We were very excited when he agreed to join us. And Suzanne Franks is an analyst with a lot of experience, and one we’ve worked with for the last six years on specific names for the Fund. So both new members, we’re really happy to have them join the team.

What do Rob and Suzanne each bring to the team?

So great news for our team, our investors; both Rob and Suzanne have a love of small-cap companies. Have a lot of experience in the part of the market that we love so much, the small- and the micro-cap value names. And really an energy and a commitment to these names, to doing your own work and really continuing our process, right? When we add people, we’re not looking for a new process or a new way of doing business; we’re looking for people who could really execute on what already is a well-proven process.

What’s your current view on the small-cap market?

We’re where we should be at this point in the cycle. You've got good growth, you've got good data coming from employment, and just about every other metric that you look at says things are okay. The market is at a point in the cycle where it's been well-picked-over. There are no secrets as to the strength driving that. Principally you're talking about earnings, you're talking about an economy that's growing better than expected. And you're talking about valuations especially for growth names that you could say are stretched, and valuations on the value side that are not stretched.

Small-Cap Value’s Valuation Looks Cheap vs. Small-Cap Growth
Russell 2000 Value and Growth Shifted Median Relative LTM EV/EBIT1
From 12/31/01 to 9/30/18

russell 2000 value and growth

1 Last twelve months Enterprise Value/Earnings Before Interest and Taxes.
Source: FactSet

There's been a huge difference in performance, as many of you know, between the growth names in the Russell 2000 and the value names. We’re excited in that there are opportunities, but you have to really work hard and find those things that are going to give you something that the market is not expecting, right? So everybody knows you know, where the strengths are, where the weaknesses are. And those are factored into the numbers and they're factored into the stock prices, but if you could find things, which is what we’re good at, finding those names that don’t really discount what could be much better than expected results.

Where have you been finding opportunities?

Well the opportunities that we find and those things that are doing best are not necessarily the same, right? So the opportunities are sort of scattered amongst the all different types of themes that we have.

Opportunity Strategy’s Four Investment Themes
As of 9/30/18

royce opportunity four themes

So in a fund like this that has four themes: the asset plays, the undervalued growth, turnarounds, the interrupted earnings, it's typical at this point in the cycle where you've been through some fairly good growth, especially in the last two years where the turnarounds and the undervalued growth names would be doing best, and you wouldn't be getting a lot of performance out of the asset plays and the busted IPOs and the interrupted earnings at this point in the cycle.

So we’re not surprised that it’s where you would think you'd be getting the strength. There are no sector bets that we find just incredible in here. If you're in a cyclical industry, whether it's in steel or any other metals, anyone supplying big industries like autos—even power—you've been really capped at your valuation mostly because of the trade issues which have led people to believe that perhaps this cycle gets clipped a little bit faster than previously thought. And as a result you've got most of these companies trading at very, very low multiples, which is indicative of the end of cycle. If we’re to go on longer than is currently expected these names could offer some significant upside going forward.

More On Royce Opportunity Fund

 

Important Disclosure Information

Average Annual Total Returns as of 9/30/18 (%) 

  QTR1 1YR 3YR 5YR 10YR 15YR 20YR SINCE INCEPT. DATE
Opportunity 1.27 9.08 19.22 9.69 11.74 10.45 13.26 12.52 11/19/96
Russell 2000 3.58 15.24 17.12 11.07 11.11 10.12 9.45 8.96 N/A
Russell 2000 Value 1.60 9.33 16.12 9.91 9.52 9.50 9.83 9.83 N/A

Annual Operating Expenses: 1.18% 

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 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 at www.roycefunds.com. 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 and other expenses.

The thoughts and opinions expressed in the video are solely those of the persons speaking as of October 15, 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.

The performance data and trends outlined in this presentation are presented for illustrative purposes only. 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 2000 Value and Growth indexes consist of the respective value and growth stocks within the Russell 2000 as determined by Russell Investments. The performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index.

Cyclical and Defensive are defined as follows: Cyclical: Communication Services, Consumer Discretionary, Energy, Financials, Industrials, Information Technology, and Materials. Defensive: Consumer Staples, Health Care, Real Estate, Utilities.

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. The Fund invests primarily in small-cap and micro-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.

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