article 04-17-2017

Lauren Romeo in Welling on Wall St: Passion for Small-Caps

Portfolio Manager Lauren Romeo joins Kate Welling of Welling on Wall St. to discuss where she is finding opportunities in the small-cap space and what drives her quality-centric investment approach. 

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Portfolio Manager Lauren Romeo joins Kate Welling of Welling on Wall St. for an exclusive interview, discussing her passion for small-caps and where she's finding opportunities for her funds.

"I love finding stock ideas. Then I love, once I've gotten the idea, the process of digging in and first doing the background research and trying to understand the economics of the business and trying to see what's made this a great business model – if it is one – figuring out whether it is sustainable, and figuring out what could change."

Describing why she enjoys working within small-caps, Lauren said: "I've always liked the small-cap space, where you can have direct access to the CEO and CFO. In small-caps, you really get into some great discussions about strategy, and I learn a lot from the companies."

She also comments on the shift from growth to value, "I am a believer in reversion to the mean and after seeing how far small-cap growth had swung in terms of its valuation relative to small-cap value – by the time it peaked in June 2015, it was outperforming small-cap value by two standard deviations – even if we just get a correction, that would be a good run for small-cap value."

Lauren describes the opportunities she's looking to in small-caps: "Hopefully, like we saw last year, there will be certain sectors rediscovered – like industrials and materials were – where there have been good values just sitting there."

As to their prospects, she said, "It was nice to see last year, when you looked at the breadth of the market, it was so much better – not only was the health care sector the worst performer in the Russell in 2016, but techs and industrials and consumer discretionaries all started to outperform, so investors were starting to broaden out, which was encouraging. Fundamentals matter."

Lauren also discusses the importance of staying true to one's discipline, even during difficult periods, "We know, if we are confident in an investment, in the price we're paying for it and in the quality of the business, over time we'll make up for any relative underperformance on upside. The nice thing about being here at Royce is that we're just trying to put together the best portfolios of companies that we can find in our universe that are trading at the most attractive valuations."

She highlights several stock picks, including Cognex, a market leader in machine vision technology, "Cognex's systems are used in auto manufacturing, in consumer electronics manufacturing. As products get smaller and smaller, it's more difficult for a human to see the parts, and the product line has to move faster. They're also used in logistics, where an ever increasing flow of packages must be sorted and sent on their way. And Cognex systems don't just "see" parts… [it] is a leader in automation technology, spending 12%-15% of revenues every year on R&D, and continued upgrading their software algos. If Royce is the Mecca of value management, then Cognex is the Mecca of machine vision."

Another pick is MKS Instruments: "They make components that go into semiconductor capital equipment… where they end up with dominant market share. They've long been a technological leader, so they end up working closely with capital equipment makers and getting designed into each new generation of equipment."

Finally, Lauren summarizes her thoughts on what's next for small-cap, "I think it's going to be more individual-stock-driven than driven by any particular sector. So many of the sectors already have had good runs that the winners will have to be differentiated. Its' going to be more about company fundamentals and specific opportunities." 

Read Lauren Romeo's full interview with Welling on Wall St. here. Please note that this article is part of Welling on Wall St.'s premium membership content. You need a paid subscription to view these articles.

Important Disclosure Information

The thoughts and opinions expressed in the article are solely those of the persons speaking as of March 14, 2017 and may differ from those of other Royce investment professionals, or the firm as a whole. There can be no assurance with regard to future market movements.

As of 3/31/17, Cognex Corporation was 0.8% of Royce Pennsylvania Mutual Fund's assets, 0.5% of Royce Small-Cap Leaders Fund's assets, 2.4% of Royce Premier Fund's assets, and 0.8% of Royce Value Trust's assets.

As of 3/31/17, MKS Instruments was 0.8% of Royce Pennsylvania Mutual Fund's assets, 2.6% of Royce Small-Cap Leaders Fund's assets, 2.3% of Royce Premier Fund's assets, and 0.3% of Royce Value Trust's assets.

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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