Royce Global Financial Services Fund Manager Commentary
article 06-30-2018

Royce Global Financial Services Fund Manager Commentary

We remain firmly committed to international investing for our global strategy in spite of some short-term reversals.


Fund Performance

After returning more than 22% in 2017, it was not surprising that the Fund saw a moderation in its pace of gains in the first half. Moreover, two elements that supported performance last year—international holdings and high weighting in asset management companies—both detracted from first-half returns. Additionally, there were significant reversals among individual holdings, as two of 2017’s winners gave back some returns and landed among the bottom five detractors, while another holding made the opposite journey, bouncing back from being one of 2017’s laggards to one of the first half’s top contributors. Royce Global Financial Services posted a modest gain of 2.6% for the first half of 2018, which trailed both the Russell 2000, which advanced 7.7%, and the Russell 25000 Financial Services Indexes, which was up 4.6%.

What Worked… And What Didn’t

The company making the biggest positive contribution to first-half performance was Virtu Financial, which uses its technology to act as a market maker and liquidity provider to the global financial markets. Based in New York City, the firm announced impressive first-quarter results in profits and earnings, thanks to increased volatility, high trading volumes, and better-than-expected progress integrating a large acquisition. In our view, the company’s business model is well positioned to benefit from the increased volatility in financial markets that we expect to see in the coming years. We discussed Popular, one of the largest Puerto Rico-based banks, in our 2017 commentary, providing our rationale for sticking with this holding, even though it lagged in that year. Strong earnings so far in 2018, along with an opportunistic, accretive acquisition, have led the stock to outperform as there are more signs of Puerto Rico recovering from last year’s devastating hurricanes.

As for positions that detracted, U.S. Global Investors is a specialty asset manager focused mostly on emerging markets, precious metals, and, more recently, digital currencies. Its shares surged in 2017 after its investment in a blockchain technology company. We were wary of this enthusiasm and sold nearly half our position, which proved prescient as its stock declined significantly in the first half of 2018 when the price of the highly volatile cryptocurrency Ethereum collapsed in March. Jupiter Fund Management, a U.K. based asset manager, fell after strong appreciation in 2017 as investors became concerned about ongoing investments in the business which will lead to cost increases in excess of revenue growth, along with continued fee declines and outflows for their funds. We held our position this year as we see a strong, well-managed franchise positioning its business for long-term growth.

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The Fund’s relative results are often driven by the fortunes of international versus U.S. stocks and asset managers versus the overall financial sector. Both factors hampered relative returns in the first half. As a result of stock price declines in local markets for most countries, which were exacerbated by a stronger dollar, holdings in only one of the 20 non-U.S. geographies where the Fund has investments contributed to returns. This marked a stark reversal from 2017, when holdings in 14 of 20 countries contributed. The Fund’s perennially large concentration in asset management & custody banks also detracted, though most came from international based asset managers due to the factors referenced above. However, most of our alternative asset management holdings, an area we have been emphasizing over the past few years, saw solid gains during the first half.


Top Contributors to Performance Year-to-Date Through 6/30/181 (%)

Virtu Financial Cl. A1.44
FRP Holdings0.64
BofI Holding0.49

1 Includes dividends

Top Detractors from Performance Year-to-Date Through 6/30/182 (%)

U.S. Global Investors Cl. A-0.67
Jupiter Fund Management-0.43
Altus Group-0.38
SEI Investments-0.30

2 Net of dividends

Current Positioning and Outlook

We began the year anticipating increased volatility, lower overall returns for small-cap stocks, rising interest rates, and strength for those global financial businesses that appeared best positioned to operate effectively in this type of environment. We saw little in the first half—either at the company or macro levels—that led us to significantly alter this view. Despite some short-term reversals, we remain firmly committed to global investing for this Fund, particularly as we believe our investors can participate in the long-term growth of some of the leading niche financial companies outside the U.S., many of which are relatively unknown to domestic investors. Moreover, we anticipate that in the coming years, the current wide valuation disparity between U.S. and international stocks will narrow, favoring international stock performance. The largest portion of the portfolio remains invested in asset management companies where we see sustained positive trends for the specialty traditional asset managers, alternative asset managers, and wealth managers we hold. The second largest area is regional banks, generally those where we see a differentiated franchise. Our exposure to banks has grown larger because we see an unusually supportive environment, including accelerating loan growth, widening interest margins, decreasing regulatory burdens, and continued low credit losses. While we remain guardedly optimistic about small-cap returns, we think the portfolio is well positioned to take advantage of the undervalued opportunities within the financial services sector.

Average Annual Total Returns Through 06/30/18 (%)

Global Financial Services -1.002.6514.458.0510.829.518.59 12/31/03

Annual Operating Expenses: Gross 1.77 Net 1.58

1 Not annualized.

Important Performance, Expense and Disclosure Information

Important Performance and Expense 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, 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 June 30, 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 6/30/18, the percentage of Fund assets was as follows: Virtu Financial Cl. A was 2.2%, FRP Holdings was 2.1%, Sprott was 2.0%, Popular was 2.6%, BofI Holding was 1.8%, U.S. Global Investors Cl. A was 0.5%, Jupiter Fund Management was 1.1%, Altus Group was 1.3%, Clarkson was 1.4%, SEI Investments was 1.7%, Ethereum 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 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. 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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