Royce International Premier Fund Manager Commentary
article 06-30-2018

Royce International Premier Fund Manager Commentary

In spite of challenges outside the U.S., the Fund maintained advantages over its benchmark for the one, three-, five-year, and since inception (12/31/10) periods ended June 30, 2018.


Fund Performance

Tariff and trade war talk, a strengthening dollar, market and economic softness in China, and slower growth in Europe all had a dampening effect on non-U.S. stocks in the first half of 2018. In spite of these challenges, the Fund maintained its advantage over its benchmark, the Russell Global ex-U.S. Small Cap Index, outpacing the index for the one, three-, five-year, and since inception (12/31/10) periods ended June 30, 2018. Royce International Premier Fund fell 3.1% for the year-to-date period ended June 30, 2018, losing slightly less than the Russell Global ex-U.S. Small Cap Index, which declined 3.8% for the same period. Most international indexes slipped into negative territory during 2018’s first six months due to the combination of the modest slowdown in international growth, rising emerging market instability, a stronger dollar, and heightened trade war concerns. However, we were encouraged that several holdings continued to execute well in the first half, and several saw otherwise positive stock market performances in their respective currencies undone by U.S. dollar strength.

What Worked… And What Didn’t

During the first half, the sectors making the largest negative impact on performance were Information Technology (the portfolio’s second-largest weighting at the end of June) and Consumer Discretionary. Only three of the portfolio’s nine equity sectors made positive contributions to year-to-date results, and only Health Care had a meaningful effect.

At the industry level, IT services (Information Technology) detracted most, followed by the construction & engineering group (Industrials). The portfolio’s top two detractors at the position level came from these two respective industries. They were also chiefly responsible for India and Switzerland having the first- and second-biggest negative effects on performance at the country level.

Vakrangee is an Indian company that operates a network of outlets providing everyday transactional services to mostly rural consumers, primarily in under-served areas. During the first quarter, the company faced questions about corporate governance and its internal investment policy, among other issues. Although Vakrangee refuted these allegations, the cloud overhanging the firm’s credibility gave us pause, and we exited our position in April. 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 added shares in the first half.

Two companies in the software industry contributed most in the first half. Bravura Solutions is an Australian funds-management software

business. Following several high-profile contract signings and the successful monetization off its innovative Sonata platform, Bravura benefited from several broker upgrades, which helped solidify its status as the industry leader in one of the world’s most attractive pension markets. We trimmed our position slightly in the first half. SimCorp is a Danish company that provides software to the asset management industry. Its shares advanced in mid-May on the release of fiscal first-quarter results that showed a 23% advance in revenue with 26% operating margins. With the shares re-rated far more quickly than we anticipated, we began to exit our position as its stock climbed.

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Relative to the benchmark year-to-date, the portfolio’s overall advantage came from sector allocation. However, the Fund also gained an edge from stock selection in Health Care, in addition to our overweight in the sector. Superior stock picks gave the portfolio another advantage in Industrials, most meaningfully in machinery and commercial services & supplies. Finally, the strength of the U.S. dollar also gave the Fund’s cash position a relative advantage. Conversely, stock selection was a detractor versus the international small-cap index in Information Technology, especially in the software, IT services, and electronic equipment, instruments & components groups. The Fund’s significantly lower exposure, as well as ineffective stock picks, hurt relative results in Real Estate, while stock selection was an issue in Consumer Discretionary.

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

Bravura Solutions1.09
TGS-NOPEC Geophysical0.53
Sartorius Stedim Biotech0.41

1 Includes dividends

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

Burkhalter Holding-0.80
SH Kelkar & Company-0.61
ITE Group 1-0.49

2 Net of dividends

Current Positioning and Outlook

At the end of June, the bulk of the portfolio’s assets remained invested in four sectors—Industrials, Information Technology, Health Care, and Materials—with the first two groups accounting for more than half of its assets. With the pace of non-U.S. growth having slowed in the first half, we used our Quality at a Reasonable Price (‘QARP’) approach to find high-quality companies trading at what we thought were low or reasonable valuations. Our goal, as always, is to find businesses that look well-positioned to deliver high returns over full market cycles. Our focus is on companies that are market leaders, typically with global reach and/or expertise, attributes that we suspect will prove timely in a period of growing U.S. dollar strength. In the first half, we added three new holdings: EPS Holdings, a Japanese clinical testing services business, ITE Group, a U.K.-based company that organizes trade exhibitions and conferences worldwide, and Kardex, a Swiss firm with a global business that offers intra-logistic services as well as automated storage solutions and material handling systems.

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

International Premier -3.39-3.0810.7711.0710.107.65 12/31/10

Annual Operating Expenses: Gross 1.65 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 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, 2019.

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 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: Bravura Solutions was 2.0%, SimCorp was 0.0%, TGS-NOPEC Geophysical was 0.0%, Sartorius Stedim Biotech was 1.6%, DiaSorin was 1.6%, Vakrangee was 0.0%, Burkhalter Holding was 1.1%, SH Kelkar & Company was 1.7%, OdontoPrev was 2.3%, ITE Group 1 was 0.0%, EPS Holdings was 1.7 %, Kardex was 1.5 %

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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