Royce International Premier Fund Manager Commentary
article 02-12-2018

Royce International Premier Fund Manager Commentary

Advancing well ahead of the Russell Global ex-U.S. Small Cap Index, we couldn’t be more pleased with the Fund’s performance.


Fund Performance

Along with strong stock selection, the rebound for international equities in 2017 helped Royce International Premier Fund to extend its relative advantage for the one-, three-, five-year, and since inception (12/31/10) periods ended December 31, 2017. The Fund gained 39.8% in 2017, well ahead of its benchmark, the Russell Global ex-U.S. Small Cap Index, which was up 30.5% for the same period.

All 11 sectors within the international small-cap index had positive returns, and all except Energy posted double-digit performance for the calendar year—thanks largely to an accelerating global economy as well as a number of relatively underwhelming years for non-U.S. stocks. The portfolio’s quality-at-a-reasonable-price (“QARP”) strategy has so far proven to be well suited to this environment.

What Worked… and What Didn’t

All of the portfolio’s nine equity sectors made positive contributions to performance. Industrials had by far the largest constructive effect, followed by notable gains for Information Technology, Health Care, and Financials. Energy, our lowest sector weighting, made the smallest contribution. Health care equipment & supplies (Health Care) led the Fund’s industry groups by a sizable margin, boosted by a number of holdings such as German ocular product specialist Carl Zeiss Meditec and New Zealand’s Fisher & Paykel Healthcare, which makes products that treat sleep apnea. None of the Fund’s industry groups detracted from 2017 results.

The smallest contributions came from Internet & direct marketing retail (Consumer Discretionary) and construction & engineering (Industrials). The countries making the biggest impacts on performance were the United Kingdom, Japan, India, Switzerland, and Germany while South Africa was the only nation that detracted from 2017 results.

Relative to the international small-cap benchmark, the portfolio benefited most from superior stock selection in Industrials, particularly in trading companies & distributors and electrical equipment. Also aiding relative performance was strong stock picking in Financials, attributable mostly to the portfolio’s top-contributing position in 2017, Indian consumer finance firm, Bajaj Finance. Stock selection was also a strength in Information Technology, Health Care, and Real Estate. The only significant drag on relative results came from the Fund’s cash position. In Materials, ineffective stock picking created a minor disadvantage versus the benchmark.

Shares of Bajaj Finance were lifted by its strong position in India’s nascent credit markets, which we believe have a long runway for growth given the nation’s fast-growing middle class and its low household debt to GDP ratio. Bajaj has also benefited from successfully cross selling services across its many locations, and we were pleased to see net income compounding at impressive levels in 2017. We held a large stake at year-end.

Based in Mumbai, Vakrangee is a technology-driven operator of a network of outlets that provide everyday transactional services to mass markets in India, primarily in under-served rural areas. The firm reported sizable increases in revenues and net income for the second half of fiscal 2017 and also announced new business alliances with Indian finance companies that add to its large roster of partnerships with the Indian government.

The top detractor at the position level was South African technology business EOH Holdings Limited, Africa’s largest independent information-technology provider, with leading positions in business process outsourcing and SAP implementation across the continent. We were attracted to its rare combination of attractive valuation, strong market position, high growth, and conservative balance sheet.

However, we sold our shares when unexplained insider selling and the threat of customer losses compounded the effects of well-publicized accounting and corruption scandals engulfing even some of the blue-chip denizens of South African business.

Shares of French veterinary medicine provider Virbac rallied late in 2016 after the U.S. Food & Drug Administration rescinded the warning letter on its St. Louis facility, only to take another hit in mid-March 2017 when an otherwise solid earnings announcement was accompanied by tepid guidance, including an anticipated decline in fiscal first-quarter revenues. After reevaluating this holding, we determined that the time horizon for turning around this family-run business looked too long relative to other attractive opportunities we saw in the market, which led us to exit the position in September.

Top Contributors to Performance 20171 (%)

Bajaj Finance2.66
Relo Group1.80
XP Power1.66
Partners Group Holding1.45

1 Includes dividends

Top Detractors from Performance 20172 (%)

EOH Holdings Limited-1.02
Spotless Group Holdings-0.01
SH Kelkar & Company0.10

2 Net of dividends

Current Positioning and Outlook

The focus of our ‘QARP’ strategy will remain primarily in developed markets, especially in Europe north of the Alps, the U.K., Japan, Australia, New Zealand, and Canada, as well as in select emerging markets. Following several years of below-average returns, we suspect a long—and potentially profitable—period of catch-up could be in the offing. We believe that valuations for select international companies remain attractive, so it’s not surprising that our outlook has not changed radically or that 2017’s performance did not necessitate any significant repositioning in the portfolio. We remain sanguine about both outlook and positioning and believe that our overweights in markets such as the U.K., Australia, and Switzerland may prove timely in 2018 as these markets substantially lagged the index in 2017.

Average Annual Total Returns Through 12/31/17 (%)

International Premier 6.1139.8139.8117.1511.798.70 12/31/10

Annual Operating Expenses: Gross 1.65 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 Investment Class and include management 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 Investment 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 1.19% through April 30, 2018.

All performance and risk information presented in this material prior to the commencement date of Investment Class shares on 1/22/14 reflects Service Class results. Service Class shares bear an annual distribution expense that is not borne by Investment Class shares.

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, 2017, 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, 2017 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 12/31/17, the percentage of Fund assets was as follows: Bajaj Finance was 2.1%, Vakrangee was 1.0%, Relo Group was 1.9%, XP Power was 2.0%, Partners Group Holding was 2.6%, Carl Zeiss Meditec was 2.0%, Hexpol was 2.0%, SH Kelkar & Company was 2.0%, Fisher & Paykel Healthcare was 1.7%, EOH Holdings Limited was 0.0%, Spotless Group Holdings was 0.0%, Virbac was 0.0%.

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 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 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 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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