Royce Global Financial Services Fund Manager Commentary
article 06-30-2017

Royce Global Financial Services Fund Manager Commentary

The first half was particularly strong for our intentionally unconventional approach to financial companies.


Fund Performance

Royce Global Financial Services Fund advanced an impressive 9.8% for the year-to-date period ended June 30, 2017, well ahead of both its small-cap benchmark, the Russell 2000 Index, and the Russell 2500 Financial Services Index, which advanced 5.0% and 3.3%, respectively, for the same period. As we detail below, it was a particularly strong period for our intentionally unconventional approach to financial companies. It was also an opportune time in which to take a global approach to equities, virtually regardless of sector. The first half of 2017 was the best for stocks on a global basis since 2009.

The Fund’s strength was consistent on both an absolute and relative basis throughout the first half. During the first quarter, Global Financial Services rose 4.5% versus respective gains of 2.5% and 1.3% for the small-cap index and the financial services component of the Russell 2500 Index. The second quarter saw more of the same as the Fund increased 5.1% versus 2.5% for the Russell 2000 and 2.0% for the Russell 2500 Financial Services Index. Second-quarter strength came from robust results for subindustries such as asset management & custody banks (within capital markets) and regional banks.

Given the Fund’s somewhat unconventional sector fund approach, longer-term relative results were less consistent, though satisfying to us on an absolute basis. Global Financial Services outpaced the financial services companies in the Russell 2500 Index for the one-year and since inception periods (12/31/03) ended June 30, 2017. The bookend nature of this short- and long-term outperformance suggests to us that, with interest rates on the rise, the portfolio can continue to benefit from more historically typical conditions. The Fund also beat the Russell 2000 for the five-year period ended June 30, 2017 while trailing narrowly for the since inception period.

What Worked… And What Didn’t

Our approach to the financial sector is non-traditional in that we have typically been underweight in banks and significantly overweight in capital markets, in large part because our position as a small-cap asset manager makes companies in this industry easier for us to understand at a deep level. Over the last couple of years, we have been increasingly drawn to non-traditional asset managers, specifically in the alternative asset management space, which we think is an undervalued zone in an asset-light business that is not well understood by other investors. U.K.-based emerging market bond specialist Ashmore Group was the best performer in the group as it benefited from increased net inflows and a rebound in emerging market bond performance.

Alternative asset manager Fortress Investment Group, LLC was a strong contributor due to its takeover by Japan’s SoftBank. Financial exchanges & data was another standout subindustry, thanks in large part to MarketAxess Holdings, which manages the leading electronic bond trading platform. Its shares soared early in the year, lifted by significant increases in total trading volume, which included records for U.S. high-grade, Eurobond, and emerging market bond average daily volumes. It was a top-20 position at the end of the semiannual period. The portfolio’s top contributor in the first half was FirstService Corporation, a Toronto-based provider of real estate property management services. Its shares rose throughout the year’s first six months thanks to strong revenue and profit growth that exceeded expectations.

Toronto-based Dundee Corporation, which is involved in wealth management, real estate, and natural resources, was the largest detractor in the first half as mounting losses in mining and resource based activities put downward pressure on its shares. BofI Holding is the holding company for Bank of Internet USA, a consumer-focused nationwide savings bank. Its previously rapid growth was slowed after the firm reported disappointing earnings and a deceleration in loan growth. MBIA provides financial guarantee insurance and has significant exposure to Puerto Rican bonds. Investors became increasingly concerned that losses on these bonds might have a meaningfully negative impact on MBIA’s balance sheet and credit rating.

Top Contributors to Performance Year-to-Date Through 6/30/171 (%)

FirstService Corporation1.05
Ashmore Group0.67
Fortress Investment Group LLC Cl. A0.65
Live Oak Bancshares0.55
MarketAxess Holdings0.52

1 Includes dividends

Top Detractors from Performance Year-to-Date Through 6/30/172 (%)

Dundee Corporation Cl. A-0.41
BofI Holding-0.26
Medley Management Cl. A-0.19

2 Net of dividends

Current Positioning and Outlook

The Fund’s long-term holdings continue to satisfy three criteria: business models that are highly profitable and preferably asset-light; industries where we believe our asset management experience yields relevant insights; and subsectors across financial services that appear positioned for above-average revenue growth. Areas where we see attractive growth prospects currently include specialized traditional asset management, private equity and private debt alternative asset management, wealth management, boutique M&A advisory firms, non-traditional providers of transaction platforms, and financial service providers in emerging economies.

In addition, the Fund aims for opportunistic purchases in companies and industries that we believe are heading for improved conditions. The recent increased weighting in banks falls into this category. We anticipate that an economic environment with a steeper yield curve, a moderate pick-up in economic growth, and lighter regulation will support faster loan growth with expanding margins for many small-cap banks. The outlook we have developed from meeting with companies is one of increasing cyclical growth, particularly outside the U.S., though at a “just right” Goldilocks pace, and not so fast as to lead to an aggressive central bank response.

Average Annual Total Returns Through 06/30/17 (%)

Global Financial Services 5.139.8323.415.6714.135.858.17 12/31/03

Annual Operating Expenses: Gross 1.77 Net 1.58

1 Not annualized.

Important Performance, Expense and Disclosure Information

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 June 30, 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 June 30, 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 6/30/17, the percentage of Fund assets was as follows: FirstService Corporation was 2.9%, Ashmore Group was 2.5%, Fortress Investment Group LLC Cl. A was 0.0%, Live Oak Bancshares was 2.1%, MarketAxess Holdings was 1.8%, Dundee Corporation Cl. A was 0.4%, BofI Holding was 1.2%, MBIA was 1.7%, JSE was 0.9%, Medley Management Cl. A was 0.4%.

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.)



Sign Up