Chip Skinner on the Current Market and Royce Value Plus Fund by Royce Funds

Value Plus combines the elements of a value and growth approach. Portfolio Manager Chip Skinner tells Co-Chief Investment Officer Chris Clark how he’s been managing his portfolio in the current market environment.

See Chip Skinner on the Current Market and Royce Value Plus Fund video here.

Chris Clark: Chip, 2013 was an interesting year. It was the first in a number where we hadn’t had a significant correction. Thus far, in 2014, we’ve had two corrections of approximately 8% each. What do you think that means, and how are you managing your portfolio through those corrections?

Chip Skinner: Well, Chris, if you look over time, the small-cap area, particularly the small-cap growth area of the market, has seen periodic corrections. You know, these sort of range from 7% up to close to 20%.

That doesn’t necessarily mean that we’re in a bear market but I think it’s more of a healthy cleansing of valuations. It reduces some of the speculation in the market, and really determines who are the long-term holders in a stock. So I see it as a healthy thing.

I was saying last year that we probably were overdue for one. Having said that, they’re never fun, but it also gives us an opportunity to perhaps look at some companies that have been too expensive in the past.

Chris: What gives you confidence that these are just corrections, and, perhaps, what’s your view for the rest of the year and beyond that you think will continue to be constructive in Value Plus?

Chip Skinner: Well, I think you can point to several things that perhaps have driven this pullback. There are some political and geopolitical factors that have made people more cautious, but my belief is that the economy is actually, perhaps, accelerating. Rates continue to be low. They’ve very low on a historical basis today.

Chris: Your portfolio looks like it’s skewed a little bit towards cyclical growth, and, again, that’s something somewhat unique in the growth investing space. Talk about your interest in industrials and some of the more traditional value sectors that may actually have some growth elements to them.

Chip Skinner: I’m investing on a bottom-up stock picking sort of basis. I’m looking for companies that have either an innovative product and are taking market share, and, therefore, growing perhaps faster than other companies in that space, and so there are always going to be companies that are applying technology in the industrial space.

The commercial construction recovery is a theme of mine. We have a number of companies that should benefit. They’re doing quite well today in terms of the downturn of that market, but, you know, I think they’re going to do even better when things turn there.

Chris: Describe a stock in that area that would give you an example of your process and how you are expressing it in, again, what is a traditionally more cyclical space.

Chip Skinner: One example would be Acuity. It is a lighting fixture company. It has been around for some time. It was actually a spin-off from a larger company. It has a great management team. They have actually been buys during the downturn retrofitting buildings and helping companies reduce their electricity usage.

One way they’ve done that is through creating LED lighting solutions, and so this has been a big driver. It basically came from zero a couple of years ago. It’s growing very rapidly within a slower growing commercial lighting segment, and they’ve been putting out fantastic growth, even though it is a commercial construction related company.