Royce International Premier Fund Manager Commentary
article 02-14-2019

Royce International Premier Fund Manager Commentary

Our QARP (“Quality At a Reasonable Price”) strategy greatly outpaced its new benchmark in the bear market environment of 2018 and for the for the three-, five-year, and since inception (12/31/10) periods ended 12/31/18.


Fund Performance

Royce International Premier Fund was down 12.8% in 2018, losing significantly less than both its new benchmark, the MSCI ACWI ex USA Small Cap Index, which declined 18.2%, and the Russell Global ex-U.S. Small Cap Index (which Russell Investments has discontinued), which fell 17.9% for the same period. As we would hope, better performance in a down market, in particular through the steep decline in 2018’s fourth quarter, was a factor in helping our QARP (“Quality At a Reasonable Price”) strategy to also outpace both indexes for the three-, five-year, and since inception (12/31/10) periods ended December 31, 2018.

What Worked… And What Didn’t

Nine of the 10 equity sectors in which the portfolio held investments detracted from results in 2018, with only Consumer Staples managing a slight positive contribution. Industrials was by far the largest detractor, followed by Materials and Information Technology. SH Kelkar & Company detracted most at the position level. A family-run firm and one of the largest fragrance producers in India, its earnings were hurt as rising input costs and a dip in demand from certain export markets crimped margins. Thinking more about the long term, we like the firm’s long record of business success, which led us to hold our position. We held in a similar opinion about Computer Modelling Group, a Canadian software company whose products help oil companies maximize extractions. Its shares slumped in the second half due to its exposure to the energy industry, which was hurt by falling oil prices, and some slight disappointments in the firm’s revenues and earnings. Based on its lack of debt, relatively high annual dividend, and strong position in a highly specialized niche, we liked its long-term prospects at year-end. Burkhalter Holding is the leading provider of electrical engineering services in Switzerland. Its stock price was hurt by increasing talk that competition would pressure pricing. Seeing these issues as more temporal than structural, we held our position at year-end.

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On the positive side, Australia’s Bravura Solutions Limited makes software that focuses on the wealth management and investment fund administration markets. It has what we like in its industry—a market and product application we can readily understand that also delivers mission-critical customer benefits. The company offers a market-leading product, developed after a multi-year period of substantial R&D, and was able to take market share in a growing market. Sartorius Stedim Biotech is listed in France, but headquartered in Germany. The firm manufactures mostly single use or consumable products used by biopharmaceutical companies. Many of its products have technology-based barriers to entry that are further raised by the strict certification processes imposed by the FDA and other regulatory authorities around the globe. Strong earnings helped its stock in 2018. Trade Me Group, New Zealand’s leader in online classifieds, saw its shares rise when a bidding war broke out between two rival suitors, prompting us to sell our stake. While we always try to be mindful of portfolio turnover, holdings are not infrequently the targets of acquisition offers.

Relative to the MSCI ACWI ex USA Small Cap, the Fund benefited from stock selection in 2018 while sector allocation had a modest negative impact. Stock selection drove results most in the Industrials, Information Technology, and Health Care (where our overweight also helped relative results) sectors. Conversely, lower exposure and ineffective stock selection were relative disadvantages in Real Estate and Communication Services. In Materials, the chemicals group had a negative effect on relative returns, as did our lack of exposure to Utilities and our lower exposure to Consumer Staples.

Top Contributors to Performance 20181 (%)

Bravura Solutions1.15
Sartorius Stedim Biotech0.66
Trade Me Group0.52
TGS-NOPEC Geophysical0.48

1 Includes dividends

Top Detractors from Performance 20182 (%)

SH Kelkar & Company-0.97
Computer Modelling Group-0.93
Burkhalter Holding-0.87
ITE Group-0.75

2 Net of dividends

Current Positioning and Outlook

At the end of the year, the portfolio’s largest country overweights were Switzerland, Australia, and Sweden. The first is, in our view, perhaps the highest-quality small-cap market in the world, and we typically maintain an overweight in positions based there. Australia’s equity markets and currency weakened in 2018 due to perceived overreliance on commodities and trade with China. In our view, this has resulted in attractive valuations for high-quality names. Slower global growth created challenges for many international small-caps in 2018, while also making valuations look more attractive to us as we entered 2019. The portfolio had lower exposure to Consumer Discretionary at the end of December, in part due to the departure of Trade Me Group. We also added two positions in Industrials, as diverse a sector outside the U.S. as it is within. Market volatility gave us the opportunity to buy shares of two long-followed companies—IMCD, a leader in the marketing and distribution of specialty chemicals and food additives that’s headquartered in the Netherlands, and Loomis, a Swedish firm that’s a global leader in the transit of cash and valuables. In Materials, we returned to a previously held investment, Fuchs Petrolub, a German business that has grown into one of the world’s largest independent manufacturers of lubricants. We are very pleased with the quality of the businesses we hold as we enter 2019.

Average Annual Total Returns Through 12/31/18 (%)

International Premier -12.48-12.76-12.766.475.185.76 12/31/10

Annual Operating Expenses: Gross 1.59 Net 1.44

1 Not annualized.

Important Performance and Disclosure Information

Important Performance and Expense Information

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 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. 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.

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

Notes to Performance and Other Important Information

The thoughts expressed in this report concerning recent market movements and future prospects for small company stocks are solely the opinion of Royce at December 31, 2018, 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 December 31, 2018 and are subject to change at any time without notice. There can be no assurance that securities mentioned in this report will be included in any Royce-managed portfolio in the future.

As of 12/31/18, the percentage of Fund assets was as follows: Bravura Solutions was 1.7%, Sartorius Stedim Biotech was 0.0%, SimCorp was 1.5%, Trade Me Group was 0.0%, TGS-NOPEC Geophysical was 0.0%, SH Kelkar & Company was 1.4%, Computer Modelling Group was 1.7%, Burkhalter Holding was 1.5%, Vakrangee was 0.0%, ITE Group was 0.0%, IMCD was 2.2%, Loomis was 1.5%, FUCHS PETROLAB was 2.0%

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. 

All indexes referred to are unmanaged and capitalization weighted. Each index’s returns include net reinvested dividends and/or interest income. 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 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 Russell 1000 Index is an index of domestic large-cap stocks. It measures the performance of the 1,000 largest publicly traded U.S. companies in the Russell 3000 Index. The Russell Microcap Index includes 1,000 of the smallest securities in the Russell 2000 Index, along with the next smallest eligible securities as determined by Russell. The Russell Midcap Index measures the performance of the mid-cap segment of the U.S. equity universe. It includes approximately 800 of the smallest securities in the Russell 1000 Index. The Russell Global ex-U.S. Small Cap Index is an index of global small-cap stocks, excluding the United States. The Russell Global ex-U.S. Large Cap Index is an index of global large-cap stocks, excluding the United States. The Russell 2500 is an unmanaged, capitalization-weighted index of the 2,500 smallest publicly traded U.S. companies in the Russell 3000 index. 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 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. Returns for the market indexes used in this report were based on information supplied to Royce by Russell Investments. Royce has not independently verified the above described information.

This material contains forward-looking statements within the meaning of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve risks and uncertainties, including, among others, statements as to: 

-the Funds’ future operating results,

-the prospects of the Funds’ portfolio companies,

-the impact of investments that the Funds have made or may make, the dependence of the Funds’ future success on the general economy and its impact on the companies and industries in which the Funds invest, and

-the ability of the Funds’ portfolio companies to achieve their objectives.

This discussion uses words such as “anticipates,” “believes,” “expects,” “future,” “intends,” and similar expressions to identify forward-looking statements. Actual results may differ materially from those projected in the forward-looking statements for any reason.

The Royce Funds have based the forward-looking statements included in this commentary on information available to us on the date of the commentary, and we assume no obligation to update any such forward-looking statements. Although The Royce Funds undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events, or otherwise, you are advised to consult any additional disclosures that we may make through future shareholder communications or reports.

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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