article 06-30-2015

Royce International Premier Fund Manager Commentary

Our highest conviction is, as always, reserved for conservatively capitalized companies that earn high returns on invested capital and demonstrate the ability to compound wealth over the long term.

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Fund Performance

We were very pleased with Royce International Premier Fund's absolute and relative performance in the first half. For the year-to-date period ended June 30, 2015 the Fund gained 13.7%, outperforming its benchmark, the Russell Global ex-U.S. Small Cap Index, which advanced 7.7% for the same period. While U.S. stocks kicked off 2015 on a decidedly bearish note, results for non-U.S. equities were more mixed. International Premier finished January with a small gain before increasing its edge over the benchmark when shares rallied in February. Though the Fund's fortunes reversed in March, its underperformance during this period did little to deter its first-quarter relative advantage (+5.4% versus +3.7% for the index).

International Premier also enjoyed a strong second quarter, outpacing the Russell Global ex-U.S. Small Cap in all three months. This included a solid advantage in June, in which equities were rocked both by the Greek default and China's rapidly declining stock market. For the second quarter, International Premier was up 7.9% compared to the index's 3.9% advance. In addition to its strong first-half showing, the Fund outperformed its benchmark in the one-, three-year, and since inception (12/31/10) periods ended June 30, 2015.

What Worked... And What Didn't

All of the Fund's eight equity sectors contributed to performance in the first half, with Industrials nearly doubling the net gain of Consumer Discretionary, the Fund's second-largest contributor. Notable contributions also came from Information Technology and Financials. It's important to point out that most of these sectors also fared very well compared to the Fund's non-U.S. small-cap benchmark. The portfolio's strongest industries in the first half included electronic equipment, instruments & components stocks, consumer finance companies, and capital markets. Net losses at the industry level were comparatively modest and limited to two groups—real estate management & development stocks and diversified financial services companies. At the country level, the healthiest overall contributions came from holdings headquartered in the U.K., Switzerland, Japan, and India, while Brazil, Malaysia, Chile, Sweden, and Germany detracted, albeit on a relatively smaller scale.

The Fund's two largest positions at the end of June were also its two top contributors to first-half performance. India's Bajaj Finance offers an array of services including wealth management, commercial lending, and consumer finance. Its shares have been rising more or less steadily for more than a year. The company continued to experience profitable growth in the first half, largely in its consumer finance segment. London-based Clarkson is an investment holding company whose subsidiaries provide integrated shipping services worldwide. Its stock began to rise in February and did well through the remainder of 2015's first half, reaching new highs at the end of June. Strong results for fiscal 2014, which were well ahead of market expectations, and a double-digit growth outlook helped drive performance. Clarkson's entrance into the FTSE 250 index on the London Stock Exchange in mid-April, a move that required U.K. index funds to invest in the stock, also played a part. Japan's TOTO also made a strong contribution to performance. The world's largest toilet manufacturer, TOTO saw its shares rise when it announced an increase to its dividend in April.

Conversely, LPS Brasil Consultoria de Imoveis—Brazil's leading real estate brokerage firm—detracted from performance in the first half. Brazil's troubled economy continued to weigh on real estate sales as a combination of government scandals and painfully slow reforms has hurt consumer confidence. LPS's secondary sales (preexisting properties) have also been weak. Another detractor was Singapore-based Silverlake Axis—a top contributor in 2014. The company, which provides customized software to banks and insurance companies, found itself in the curious position of seeing its shares decline when a financial blogger questioned its accounting practices. After a disappointing 2014, the stock price of LPKF Laser & Electronics briefly rallied in early 2015 before falling again in March. A disappointing fiscal first quarter accelerated the decline. Seeing what we deemed were more promising long-term opportunities elsewhere, we sold our shares in all three companies during the first half.


Top Contributors to Performance
Year-to-Date Through 6/30/15 (%)1

Bajaj Finance 1.45
Clarkson 1.10
TOTO 0.95
VZ Holding 0.91
AVEVA Group 0.87
1 Includes dividends

Top Detractors from Performance
Year-to-Date Through 6/30/15 (%)2

LPS Brasil Consultoria de Imoveis -0.43
Silverlake Axis -0.24
LPKF Laser & Electronics -0.21
Media Prima -0.21
CETIP-Mercados Organizados -0.18
2 Net of dividends

Current Positioning and Outlook

At the end of June the portfolio was slightly overweight in Consumer Discretionary, comfortably overweight in Industrials, and had substantially more exposure than its benchmark in Information Technology and Health Care. Holdings headquartered in the U.K. and Switzerland comprised slightly less than half of net assets. Our highest conviction is, as always, reserved for conservatively capitalized companies that earn high returns on invested capital and demonstrate the ability to compound wealth over the long term. We believe corporate profit margins for many non-U.S. companies that fit this profile were trading well below their historic peaks during the first half.

Average Annual Total Returns as of Quarter-End 6/30/15 (%)

  QTR* YTD* 1 YR 3 YR SINCE INCEPT. DATE
International Premier 7.94 13.72 1.08 11.95 5.43 12/31/2010
Russell Glo x US SC 3.93 7.74 -3.46 11.35 3.67 N/A
Annual Operating Expenses: Gross 2.30% Net 1.54%

* Not Annualized

Current month-end performance may be obtained at our Prices and Performance page.

Important Performance, Expense, and Disclosure Information

All performance information in this piece 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 here. All performance and risk information reflects results of the Service Class (its oldest class). Gross operating expenses reflect total gross annual operating expenses 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. Royce & Associates has contractually agreed to waive its fees and/or reimburse operating expenses to the extent necessary to maintain the Fund’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 1.54% through April 30, 2016 and at or below 1.99% through April 30, 2025. Regarding the "Top Contributors" and "Top Detractors" tables shown above, the sum of all contributors to, and all detractors from, performance for all securities in the portfolio would approximate the Fund’s year-to-date performance for 2015.

The thoughts expressed in this piece concerning recent market movements and future prospects for small company stocks are solely the opinion of Royce at June 30, 2015, and, of course, historical market trends are not necessarily indicative of future market movements. Statements regarding the future prospects for particular securities held in the Funds' portfolios and Royce's investment intentions with respect to those securities reflect Royce's opinions as of June 30, 2015 and are subject to change at any time without notice. There can be no assurance that securities mentioned above will be included in any Royce-managed portfolio 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. 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.) 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 Global ex-U.S. 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.

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