Royce Micro-Cap Trust Manager Commentary
article 06-30-2018

Royce Micro-Cap Trust Manager Commentary

Strong stock selection and the advantage of micro-cap stocks being the best-performing U.S. asset class in the first half of the year helped the portfolio advance, outpacing the Russell 2000 but falling behind the Russell Microcap.

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Fund Performance

A strong absolute performance helped Royce Micro-Cap Trust (“RMT”) to further solidify advantages over both of its unleveraged benchmarks, the small-cap Russell 2000 and Russell Microcap Indexes. RMT beat the Russell 2000 on both a net asset value (“NAV”) and market price basis for the one-, three-, five-, 15-, 20-year, and since inception (12/14/93) periods ended June 30, 2018. It also outpaced the micro-cap index on both an NAV and market price basis for the three- and 15-year periods ended June 30, 2018. (Data for the Russell Microcap Index goes back only to 6/30/00). The Fund advanced 7.8% on an NAV basis and 9.7% based on market price for the year-to-date period ended June 30, 2018, outpacing the Russell 2000, which was up 7.7%, but behind the 10.7% gain for the Russell Microcap for the same period.

What Worked… And What Didn’t

Though the market’s preference for higher growth and more yield-sensitive equities created challenges for our approach, this was balanced by the overall strength of micro-cap stocks, which were the best-performing U.S. asset class in the first half of the year, along with select stock selection advantages.

Seven of the portfolio’s 11 equity sectors made positive contributions to performance, with Information Technology and Health Care making outsized impacts, followed by Energy. Three sectors detracted from first-half results—Materials, Industrials, and Consumer Staples—though their collective negative impact was modest. This was paralleled somewhat at the industry level, where two groups dominated the positive contributors—electronic equipment, instruments & components (Information Technology) and health care equipment & supplies (Health Care)—and the impact of detractors, led by machinery (Industrials) and pharmaceuticals (Health Care), was far more modest.

The portfolio’s top contributor at the position level, Mesa Laboratories, is in the electronic equipment, instruments & components group, though it does most of its business with hospitals, pharmaceutical and medical device manufacturers, and research laboratories by offering quality control and calibration products and services. The company reported record revenues for its fiscal fourth quarter and 2018, driven in part by strong results in each of its four divisions and greater efficiencies from the firm’s proprietary operating system that helped it to better manage inventories and speed up deliveries. Three healthcare companies were also among RMT’s top contributors in the first half, including medical device company Surmodics, which specializes in coronary stents and catheters. The firm recently engaged in an agreement with Abbot Laboratories that granted exclusive global commercialization rights for the company’s

SurVeil drug. Although we trimmed our position slightly in early July, its extended pipeline of interesting products made us happy to hold a sizable position at the end of June.

Collectors Universe, which provides authentication and grading services to dealers and collectors of coins, trading cards, event tickets, autographs, and historical and sports memorabilia, detracted most at the position level. The company’s fiscal second quarter was slower than was expected, as softness in coin submissions in China, weakness in the vintage coin market, and a decline in modern coin sales at the U.S. Mint all combined to adversely affect results. Shares of Sun Hydraulics, which makes hydraulic and electronic valves, controls, and instruments for industrial machinery and off-highway vehicles, saw its share price tumble. Despite robust sales growth, the company’s margins and earnings have been weaker than expected due to operating inefficiencies incurred by a ramp up to meet strong demand, as well as higher materials and commodity costs. We expect a reversal as the impact of management’s corrective actions—which include price increases, new supply agreements to ease constraints, and reduced temporary and overtime labor—to take effect.


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Relative to the Russell 2000, the Fund’s biggest advantage came from savvy stock selection in the Energy sector’s energy equipment & services industry, while stock picking was also a strength in the real estate management & development group. A combination of superior stock selection and our overweight gave us an additional, though slighter, edge in Information Technology. Conversely, relative results were hurt by a mix of larger exposure and stock selection miscues in Industrials. Stock picking was an issue in the Materials sector, primarily in the metals & mining group, while the portfolio’s cash position also detracted from first-half performance.


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

Mesa Laboratories0.81
Surmodics0.76
Zafgen0.64
Mirati Therapeutics0.55
SEACOR Marine Holdings0.54

1 Includes dividends

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

Collectors Universe-0.35
Sun Hydraulics-0.27
Aquinox Pharmaceuticals-0.26
Real Matters-0.22
U.S. Global Investors Cl. A-0.21

2 Net of dividends

Current Positioning And Outlook

The market’s recent behavior looks curious to us. We hear optimism and solid progress from the management teams we meet with, see solid earnings reports, and observe consistently strong macroeconomic data. Yet small- and micro-cap market leadership has stubbornly remained with defensive and yield-oriented stocks, while cyclicals have lagged. We are therefore far from ebullient, as we anticipate that increased volatility will accompany a shift in market leadership to value/cyclical leadership. We are also mindful that these shifts rarely occur without some turbulence, so we have sought to position the portfolio for increased volatility and lower returns.

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

QTR1 YTD1 1YR 3YR 5YR 10YR 15YR 20YR SINCE INCEPT. DATE
RMT 8.609.7224.6413.7213.099.8410.7210.0510.65 12/14/93
XOTCX 7.167.8419.7911.1612.519.9210.769.8111.19 12/14/93
Russell 2000 7.757.6617.5710.9612.4610.6010.508.039.44 N/A
Russell Microcap 9.9710.7120.2110.4912.7810.639.44N/AN/A N/A

Annual Operating Expenses: N/A

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, net of the Fund's investment advisory fee, and reflects the reinvestment of distributions. Past performance is no guarantee of future results Current performance may be higher or lower than performance quoted. Returns as of the recent month-end may be obtained at www.roycefunds.com. The market price of the Fund's shares will fluctuate, so that shares may be worth more or less than their original cost when sold.

The Fund normally invests in micro-cap companies, which may involve considerably more risk than investing in larger-cap companies. The Fund's broadly diversified portfolio does not ensure a profit or guarantee against loss.

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: Mesa Laboratories was 2.2%, Surmodics was 1.6%, Zafgen was 1.1%, Mirati Therapeutics was 0.6%, SEACOR Marine Holdings was 1.1%, Collectors Universe was 0.4%, Sun Hydraulics was 0.8%, Aquinox Pharmaceuticals was 0.1%, Real Matters was 0.3%, U.S. Global Investors Cl. A was 0.2%


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.

The Fund is a closed-end registered investment company whose shares of common stock may trade at a discount to their net asset value. Shares of the Fund's common stock are also subject to the market risks of investing in the underlying portfolio securities held by the Fund.

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