Finding Opportunities Amid International Economic Weakness
article , video 05-07-2019

Finding Opportunities Amid International Economic Weakness

David Nadel discusses three international small-cap holdings and how our Quality at a Reasonable Price strategy has performed recently.

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How has the strategy performed over the last few quarters?

Well it's been very pleasing the last couple of quarters. We had kind of a fair amount of volatility just over that short period of time, so the fourth quarter of 2018 obviously a big down quarter. We were pleased to outperform our benchmark, preserving capital basically just by losing less than the benchmark did.

But then we got a snapback rally in the first quarter of 2019. It usually tends to be the case that those snapback rallies are led in the market by the type of investments that International Premier tends to deemphasize. Things like deep cyclicals, emerging markets, commodities. So we were pleased but a little bit surprised, by that juxtaposition of those two quarters.

Which market environments are challenging for the strategy?

We’re on our ninth year now with the strategy, so there's a fair amount of data to work with to understand which market environments are challenging. Since this is a high-quality focused strategy, those market environments that are challenging fall into kind of the lower quality, or more levered or more speculative bucket.

So areas like deep cyclicals, commodity businesses, low-margin, high-asset intensity, etc. EM businesses, we tend to be underweight EM. And then even infrastructure companies. It's not common that you get an infrastructure rally, but when you do, it's not generally great for our strategy.

Is the economic weakness in Europe creating opportunities for the strategy?

When there is economic weakness, it often benefits us because the perception is that all small-cap companies must be more cyclical than, you know, let’s say very established large-cap companies in the same sectors. So we have been able to use that perception and some of that share price volatility to our advantage in terms of the European portion of our portfolio.

Where are you finding opportunities?

One of the companies that we added on that sharp downdraft is a business we’ve been following for many years called IMCD. By description they are a distributor of specialty chemicals, including ingredients for cosmetics and food.

On the other hand, their model is really all about expertise. They have laboratories all over the world that have chemical engineers and chemists in them. So they're able to essentially be an outsourced marketing department for their suppliers.

A lot of our companies in the business description they look exceedingly boring, and maybe IMCD is boring at some level, because it's such a consistent producer. But I think the part people will miss with a company like that is they'll pigeonhole it as a distributor. Distribution businesses are not normally that interesting. But you know, when you're getting near a double-digit operating margin, you must be doing something a little different. That's kind of the special sauce there.

There's a couple of positions that we added in the fourth quarter. One of them really was, what we would call a boomerang, so a position that had been held before. That's a company called Fuchs Petrolub. They are the global number one pure play lubricant business, specialized lubricant business. They compete with the large integrated oil E&P lubricant divisions, but again, they're a pure play. A large amount of customization in the products that they're serving, again, a big team of chemists and chemical engineers, interesting customer relationship that they have with that type of a business.

Another one that we added both in the fourth quarter initially, to the portfolio, and then continued to add in the first quarter is Loomis. And Loomis is a Swedish company. Its roots go back over 150 years. It is a global leader in the area of cash transit and valuables transit.

 

ROYCE INTERNATIONAL PREMIER FUND

 

Important Disclosure Information

Average Annual Total Returns as of 3/31/19 (%) 

  1Q19 1YR 3YR 5YR SINCE INCEPT. DATE
International Premier 13.45 -1.34 11.49 7.69 7.21 12/31/10
MSCI ACWI x USA SC 10.26 -9.49 7.01 3.26 4.21 N/A

Annual Operating Expenses: 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 prospectus dated 5/1/18. Royce & Associates has contractually agreed, without right of termination, to waive fees and/or reimburse expenses to the extent necessary to maintain the Service Class's 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) at or below 1.44% through April 30, 2019.

The thoughts and opinions expressed in the video are solely those of the persons speaking as of April 9, 2019 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 article 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.

Percentage of Fund Holdings As of 3/31/2019 (%)

  Royce International Premier Fund

IMCD

2.1

Fuchs Petrolub

1.9

Loomis

1.7

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.

Source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indexes or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. The MSCI ACWI ex USA Small Cap Index is an unmanaged, capitalization-weighted index of global small-cap stocks, excluding the United States. Index returns include net reinvested dividends and/or interest income. 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: Consumer Discretionary, Energy, Financials, Industrials, Information Technology, Materials. Defensive: Consumer Staples, Health Care, Real Estate, Telecommunication Services, Utilities.

Sector weightings are determined using the Global Industry Classification Standard ("GICS"). GICS was developed by, and is the exclusive property of, Standard & Poor's Financial Services LLC ("S&P") and MSCI Inc. ("MSCI"). GICS is the trademark of S&P and MSCI. "Global Industry Classification Standard (GICS)" and "GICS Direct" are service marks of S&P and MSCI.

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 may invest a significant portion of its assets in foreign companies which may be subject to different risks than investments in securities of U.S. companies, including adverse political, social, economic, or other developments that are unique to a particular country or region. These risk factors may affect the prices of foreign securities issued by companies headquartered in developing countries more than those headquartered in developed countries. (Please see "Investing in Foreign Securities" in the prospectus.) Therefore, the prices of the securities of foreign companies in particular countries or regions may, at times, move in a different direction than those of the securities of U.S. companies. (Please see “Primary Risks for Fund Investors” in the prospectus.) The 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 a 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.)

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