Royce International Premier Fund Manager Commentary
article 06-30-2017

Royce International Premier Fund Manager Commentary

The first half saw an impressive rebound for international equities, and the high-quality approach we use in the Fund more than fully participated.

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Fund Performance

The first half of 2017 saw an impressive rebound for international equities, and the high-quality approach we use in Royce International Premier Fund more than fully participated. For the year-to-date period ended June 30, 2017, the Fund advanced 22.3%, well ahead of the 15.0% gain for its benchmark, the Russell Global ex-U.S. Small Cap Index, for the same period. After several years in which international small-caps languished, the current resurgence has been more than welcome.

The Fund got off to a strong start in 2017, climbing 9.3% in the first quarter compared to 9.0% for its international small-cap benchmark. In the second quarter, the Fund did even better on both an absolute and relative basis, gaining 11.9% versus 5.5% for the index. We were also pleased that International Premier beat the Russell Global ex-U.S. Small Cap for the one-, three-, five-year, and since inception (12/31/10) periods ended June 30, 2017. The Fund’s average annual total return since inception was 7.2%.

What Worked… And What Didn’t

All of the Fund’s nine equity sectors made positive contributions to first-half results. Industrials led by a sizable margin while Information Technology also made an impressive contribution, as did Financials and Health Care. By making the smallest contribution to first-half results, the Energy sector finished last.

Health care equipment & supplies (Health Care) enjoyed a substantial advantage over the portfolio’s other industry groups in the first half of 2017. Its high positive impact was driven by a trio of holdings—Fisher & Paykel Healthcare, a New Zealand company that makes products which treat sleep apnea, STRATEC Biomedical, a German firm that provides automated equipment and systems that analyze chemical and biological compounds, and Germany’s Carl Zeiss Meditec, which makes screening, diagnostic, and therapeutic systems that treat cataracts, glaucoma, and other vision problems.

Showing the diversity of both the sector and geographies, Health Care was also home to the Fund’s two largest detractors at the position level. 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. We began to add shares in May. We also built our position in Brazilian dental benefits provider OdontoPrev after first-quarter results revealed some margin erosion and less robust growth than its competitors. We viewed this as a temporary setback and believe that OdontoPrev will remain a market leader.

Two financial companies contributed most overall to first-half results. Shares of Indian consumer finance business Bajaj Finance rebounded off a relatively weak fourth quarter of 2016 that resulted from the government’s surprising decision to demonetize in November. During the first half of 2017, however, fiscal third-quarter results (released in January) revealed margin improvement and high asset quality while fiscal fourth-quarter results released in May showed the strength of Bajaj’s 320-city presence in its consumer and commercial lending operations. We believe the company can continue to benefit from its strong position in India’s nascent credit markets.

Swiss financial advisory firm Partners Group Holding saw its stock climb on the back of results reported in January that included higher-than-expected assets under management and improved profitability, as well as the market’s growing realization that much of the firm’s performance-fee stream recurs more frequently than is the industry’s norm. Japan’s Relo Group, which specializes in corporate benefits and overseas relocation support, enjoyed a terrific first half as the firm experienced better-than-anticipated growth in its property management business.

The Fund’s relative advantage over its benchmark in the first half was mostly the result of strong stock selection in three of its four largest sectors—Information Technology, Industrials, and Financials. By contrast, stock selection in Materials and our cash position created modest drags on first-half results. On a geographic basis, the portfolio’s large weightings in the U.K. and Japan helped performance while Brazil caused a minor drag.


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

Bajaj Finance1.60
Partners Group Holding0.99
Relo Group0.87
XP Power0.84
Mayr-Melnhof Karton0.76

1 Includes dividends

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

Virbac-0.24
OdontoPrev-0.19
SH Kelkar & Company-0.16
Spotless Group Holdings-0.01
Fidessa Group0.00

2 Net of dividends

Current Positioning and Outlook

We were encouraged by the recent victories for more moderate parties in France, Austria, and the Netherlands. We are also hopeful that Theresa May’s shaky win may stimulate productive debate about the details of the Brexit. More important, we see the emerging data supporting strong growth in the eurozone as a significantly positive development. This year’s second quarter was the eurozone’s best in more than six years, buoyed by strong manufacturing numbers, job growth, and elevated business confidence.

Moreover, we continue to see improving profitability from many holdings. Prior to 2017, profit margins appeared spring-loaded for several companies because their respective recoveries from the 2008-09 Financial Crisis were slow and often fitful. We have therefore been pleased to see that recent margin improvement for several holdings has been driven by ROIC-oriented key performance indicators. For disciplined quality-centric investors, then, the investment opportunities in high-quality international small-caps remain attractive from our perspective.

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

QTR1 YTD1 1YR 3YR 5YR SINCE INCEPT. DATE
International Premier 11.8822.3320.117.7311.667.18 12/31/10

Annual Operating Expenses: Gross 1.84 Net 1.44

1 Not annualized.

Important Performance, Expense and Disclosure 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 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 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: Bajaj Finance was 2.2%, Partners Group Holding was 2.9%, Relo Group was 2.3%, XP Power was 1.1%, Mayr-Melnhof Karton was 3.0%, Virbac was 2.2%, OdontoPrev was 2.2%, SH Kelkar & Company was 1.7%, Spotless Group Holdings was 0.0%, Fidessa Group was 0.0%, Carl Zeiss Meditec was 2.1%, Fisher & Paykel Healthcare was 2.0%, STRATEC Biomedical 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 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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