Royce Value Trust Manager Commentary
article 06-30-2019

Royce Value Trust Manager Commentary

We were pleased with the Fund’s performance during 2019’s first half as the Fund only outperformed its indexes on a NAV (net asset value) and market price basis, as well as outpace the Russell 2000 on an NAV basis for the one-, three-, 20-, 25-, 30-year, and since inception (11/26/86) periods ended June 30, 2019.

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Fund Performance

For the year-to-date period ended June 30, 2019, Royce Value Trust advanced 19.6% on an NAV (net asset value basis) and 22.9% based on market price compared to respective gains of 17.0% and 13.7% for RVT’s unleveraged small-cap benchmarks, the Russell 2000 and S&P 600 SmallCap Indexes for the same period. The Fund also outpaced the Russell 2000 on an NAV basis for the one-, three-, 20-, 25-, 30-year, and since inception (11/26/86) periods ended June 30, 2019.

What Worked... And What Didn't

Ten of RVT’s 11 equity sectors contributed to first-half results, with only Communication Services, one of its lowest weightings, detracting. Its four largest—Industrials, Information Technology, Financials, and Materials—made the biggest positive contributions to performance. The portfolio’s seven top-contributing industry groups came from five different sectors, with machinery (Industrials) making the biggest positive impact, followed by capital markets (Financials) and aerospace & defense (also from Industrials). Detractors had a much lower comparative effect, and only seven of the portfolio’s 62 industry groups negatively impacted results. The largest detractions came from media (Communication Services), leisure products, and Internet & direct marketing retail (both from Consumer Discretionary).

The Fund’s top contributor came from the aerospace & defense group. HEICO Corporation manufactures replacement aerospace parts. Its shares reached higher altitudes in June, after the company reported strong organic sales and expanding margins, boosted by strength in its flight support and electronics segments. These developments led HEICO to raise guidance for the rest of the year. Shares of machinery company CIRCOR International, which makes precision valves, rose sharply after receiving a takeover offer from a larger industrial company in May. Before the end of June, this company raised its equity offer, and we continue to evaluate the situation. From the tech sector’s electronic equipment, instruments & components group, FLIR Systems has a global business manufacturing thermal imaging and infrared camera systems. In late April, the company announced increased bookings, strong year-over-year margin expansion, and double-digit earnings growth. It also expects revenues to remain robust through the end of 2019. We were very pleased to see strong results from these and many other cyclical holdings in the first half.


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The biggest detractor at the position level was comScore, a technology and data analytics company that measures consumer media consumption across platforms, including websites, TV, and movies. The firm has faced accounting issues, which led to a major shakeup in upper management that was followed by a second. A long-term turnaround candidate, we are hopeful that its very strong niche in cross-platform media consumption measurement can lead it to recover. After a series of successful new product offerings, health and fitness company Nautilus suffered through two consecutive failed product launches which led to the departure of its CEO. We began to exit our position not long afterward as we expect that it will take at least a year for its new product pipeline to be rebuilt. Equally important, our confidence in management’s ability to effectively navigate the rapidly changing fitness markets was shaken. Shares of Stamps.com were hit hard after a series of negative developments: the firm announced the end of its exclusive relationship with the U.S. Postal Service in February, lowered its sales and earnings targets, and revised guidance downward. Then in May, Stamps.com reported fiscal first-quarter results that provided an even more negative outlook, all of which sent its shares into freefall through much of the first half. We added to our position as its shares looked undeniably cheap, and we think it can eventually turn its business around by finding new avenues and continuing to be a primary source for online postage and shipping solutions.

The Fund’s first-half relative outperformance was driven more by stock selection, though sector allocation also contributed. Industrials was by far the biggest source of strength, due to our overweight and even more so by our savvy stock selection, especially in the aforementioned aerospace & defense group. Stock picking drove outperformance in Financials, where our lower exposure also helped. Conversely, Consumer Discretionary, where six of 11 industries had a negative impact, detracted most, led by leisure products and Internet & direct marketing retail. Weak stock selection in the media industry within Communication Services also hindered relative performance, as did the Fund’s cash holdings.


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

HEICO Corporation0.99
CIRCOR International0.65
FLIR Systems0.48
HEICO Corporation Cl. A0.43
Ares Management Cl. A0.41

1 Includes dividends

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

comScore-0.44
Nautilus-0.34
Stamps.com-0.26
Infrastructure and Energy Alternatives-0.24
Richardson Electronics-0.12

2 Net of dividends

Current Positioning and Outlook

Markets are very good at surprising most investors. Today, with widespread concerns about slowing growth, increasing trade tensions, and the extended economic cycle, the most surprising outcome might be a rally. We see four favorable factors in the current market environment—low inflation, modest valuations, moderate growth, and increasing liquidity. When taken together, we see these factors as painting an attractive picture for small-cap investors. With so much attention on negative macro issues, we think investors may be missing this positive picture, especially with regard to profitable cyclical businesses.

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

QTR1 YTD1 1YR 3YR 5YR 10YR 15YR 20YR SINCE INCEPT. DATE
RVT 3.2122.86-3.5514.706.7113.407.049.349.71 11/26/86
XRVTX (NAV) 4.2719.55-0.4912.696.8412.907.809.1310.38 11/26/86

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 invests primarily in securities of small-cap and 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. From time to time, the Fund may invest a significant portion of its net assets in foreign securities, which may involve political, economic, currency, and other risks not encountered in U.S. investments.

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: HEICO Corporation was 2.2%, CIRCOR International was 0.4%, FLIR Systems was 2.3%, HEICO Corporation Cl. A was 1.0%, Ares Management Cl. A was 1.2%, comScore was 0.3%, Nautilus was 0.1%, Stamps.com was 0.1%, Infrastructure and Energy Alternatives was 0.1%, Richardson Electronics was 0.3%


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.

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