Royce International Premier Fund Manager Commentary
article 06-30-2019

Royce International Premier Fund Manager Commentary

Our QARP (“Quality-at-a-Reasonable-Price”) strategy significantly outperformed its benchmark during 2019’s first half and also maintained its advantage for the for the one-, three-, five-year, and since inception (12/31/10) periods ended 6/30/19.

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Fund Performance 

Royce International Premier Fund gained 21.4% for the year-to-date period ended June 30, 2019, significantly ahead of its benchmark, the MSCI ACWI ex-US Small Cap Index, which was up 11.6% for the same period. This strong absolute and relative performance helped our Quality-at-a-Reasonable-Price strategy to outpace the benchmark for the one-, three-, five-year, and since inception (12/31/10) periods ended June 30, 2019.

What Worked… And What Didn't

All eight equity sectors in which the Fund had investments made a positive impact on first-half returns, as did 16 of 18 countries. Industrials was by far the top-contributing sector, followed by Information Technology, while Materials and Consumer Discretionary contributed least. Based on each country’s headquarters, stocks in Japan and Switzerland made the largest contributions, while only China and India detracted from portfolio returns.


Based in Brazil—and buoyed in part by that nation’s economic and market recoveries—TOTVS provides enterprise resource planning and supply chain management software solutions. The company made the biggest positive contribution to first-half returns on the position level as analysts showed more confidence in its growth opportunities in FinTech. In addition, TOTVS recently completed a follow-on equity raise that strengthened its seemingly fortress-like balance sheet, providing the company with more-than-ample capital for strategic acquisitions. Kardex is a Swiss intralogistics company that manufactures automated storage and materials handling systems. Its stock began to climb in early March following the report of strong full-year earnings, which helped its shares to recover from a steep price decline in 2018’s fourth quarter. Spirax-Sarco is a U.K. company that makes steam management systems and peristaltic pumps whose outstanding record of consistent long-term organic growth and profitability first drew our attention. Its shares rose in May when it announced impressive organic growth rates so far in 2019 despite some softening in global industrial production.


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The Fund’s top detractor in the first half was TravelSky Technology, a Hong Kong listed company that dominates Global Distribution Systems (GDS) services to the Chinese aviation and travel industry primarily by connecting airline ticket suppliers, hotels, rental cars, etc. with the agencies making customer reservations. The company announced disappointing earnings for fiscal 2018 in March. While its revenues grew robustly, net profits were disappointing due to increased costs. Thinking that these were solvable, short-term issues, we added shares. Consort Medical is a U.K.-based Contract Development & Manufacturing Organization that makes high-volume, disposable drug delivery devices primarily for respiratory treatments. Full-year results announced in June showed revenues and operating profits both down, but in line with the reduced expectations set by management in December 2018. The company has also reported mixed news on the development of a relatively narrow, though expanding, portfolio of commercialized and in-development projects, which has made the stock disappointingly volatile for some time. Adding to its challenges was an explosion in its Northumberland facility in July, though we began to reduce our position in June. We chose to exit our position in SH Kelkar & Company, as this India-based, family-run fragrance producer continued to struggle.

The Fund’s outperformance versus the MSCI ACWI ex USA Small Cap came largely from stock selection, though sector allocation was also positive. Industrials contributed most, with professional services as its leading industry. Information Technology also had a notably strong impact on first-half outperformance, courtesy of strong results for the software industry, where the Fund had seven holdings and was significantly overweight versus the benchmark. The Fund’s cash position was the largest source of relative underperformance. While our 5.7% average cash level in the first half was not high, almost any amount is a meaningful drag on performance when returns are as strong as they were. Materials also detracted from relative returns, as stock selection had a negative impact.



Top Contributors to Performance Year-to-Date Through 6/30/191 (%)

TOTVS1.12
Kardex1.11
Spirax-Sarco Engineering0.92
IMCD0.89
Partners Group Holding0.83

1 Includes dividends

Top Detractors from Performance Year-to-Date Through 6/30/192 (%)

TravelSky Technology-0.40
Consort Medical-0.15
SH Kelkar & Company-0.15
Burkhalter Holding-0.04
Croda International-0.01

2 Net of dividends

Current Positioning and Outlook

After peaking in January 2018, the MSCI ACWI ex USA Small Cap Index declined to a point 15% shy of its prior high at the end of June. Global Manufacturing PMI’s were in decline over this same period, and sat at less than 50 on June 30, reflecting a contraction in global manufacturing. While we are grateful that the Fund delivered a modest positive return during this difficult 18-month period, we would also welcome more hospitable conditions for international small-cap stocks. That scenario may be approaching. Central banks appear ready to resume their accommodative positions, which will likely include increasing financial market liquidity, a development that should help small-caps. It seemed reasonable at the end of June to conclude that most, if not all, of the recent macroeconomic pessimism is fully reflected in valuations. In the absence of worsening global macroeconomic conditions, we suspect that the combination of increased central bank support, continued modest inflation, and low interest rates may all be supportive for international small-caps.

Average Annual Total Returns Through 06/30/19 (%)

QTR1 YTD1 1YR 3YR 5YR SINCE INCEPT. DATE
International Premier 6.9921.389.2613.288.647.84 12/31/10
MSCI ACWI x USA SC 1.2111.60-5.947.762.774.23 N/A

Annual Operating Expenses: Gross 1.59 Net 1.44

1 Not annualized.

Important Performance, Expense 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 www.roycefunds.com. 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, 2020.

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, 2019, 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, 2019 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 6/30/19, the percentage of Fund assets was as follows: TOTVS was 2.3%, Kardex was 2.0%, Spirax-Sarco Engineering was 2.4%, IMCD was 3.0%, Partners Group Holding was 2.8%, TravelSky Technology was 1.8%, Consort Medical was 1.1%, SH Kelkar & Company was 0.0%, Burkhalter Holding was 0.0%, Croda International was 2.1%


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 2500 is an unmanaged, capitalization-weighted index of the 2,500 smallest publicly traded U.S. companies in the Russell 3000 index. The returns for the Russell 2500-Financial Sector represent those of the financial services companies within the Russell 2500 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. 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. 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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