Royce Opportunity Fund: Looking for Success in Turnarounds by Royce Funds

Since Buzz Zaino assumed portfolio manager responsibilities in 1998, Royce Opportunity Fund has used a theme-based, opportunistic value approach with a long-term growth of capital investment objective. Today, Buzz is joined by Portfolio Manager Bill Hench, and the Fund enjoys a long-term track record that gives us great pride.

Royce Opportunity Fund: Look for Success in Turnarounds

The years following the 2008 financial crisis have been challenging for many active managers, but Buzz Zaino and Bill Hench, who manage Royce Opportunity Fund, have mostly been a happy exception to this rule (see the table below for performance through 9/30/14).

Their success—perhaps best exemplified by the Fund’s long-term rolling return results—is rooted in a highly disciplined approach that makes use of four investment themes which Buzz began to develop in the 1970s.

Each theme (all of which are variations on turnaround situations) focuses on a catalyst for potential growth in small-cap stocks that Buzz and Bill believe are trading at hefty discounts to their worth as businesses. The result is one of the more singular small-cap approaches available.

Here are the details on Buzz and Bill’s four themes: Unrecognized Asset Values are companies that tend to be selling below their probable liquidating value, franchise value, tangible book value, or physical asset value relative to plant or liquid assets. This may come in the form of real estate, a valuable franchise, plentiful cash on the balance sheet, etc. The estimated value of these assets helps to create an attractive discount provided the business also looks likely to recover.

The next theme is Turnarounds. These typically involve new management teams charged with reversing the fortunes of a business that has fallen on hard times, whether due to depressed operating margins, poor management, or more industry-specific factors.

Undervalued Growth companies are those in strong-performing industries that have not participated in the advance. These stocks are often valued with their industry and not necessarily with the business’s own progress.

Companies in this category should ultimately be capable of growing at a rate of at least 10-12% while also possessing strong balance sheets and an attractive valuation.

Opportunity has an enviable history of bull-market outperformance while also having relatively higher volatility scores than some of our more risk-averse offerings.

The last of the four themes is Interrupted Earnings, a category Buzz sometimes describes as “broken IPOs.” Most companies go public when times are very good.

But over longer business and economic cycles most of these companies will also endure a bad quarter or a difficult year, which naturally disappoints shareholders who have become accustomed to the heady growth.

The criteria here is the potential for either a 20% annual growth rate or a dominant market position, accompanied by a price-earnings multiple substantially lower than the business’s anticipated growth rate.

We think the Fund’s singular approach has served it well over the years. Buzz assumed portfolio management duties in 1998, and Bill became portfolio manager in 2013 after serving as assistant portfolio manager since 2004.

Opportunity has an enviable history of bull-market outperformance while also having relatively higher volatility scores than some of our more risk-averse offerings.

We are especially pleased with the Fund’s record of strong long-term absolute performance and its impressive record of rolling returns—both key performance metrics at Royce.

We think that Royce Opportunity Fund‘s singular take on small-cap value investing makes it a viable choice for long-term investors with a reasonable tolerance for risk.

Royce Opportunity Fund [RYPNX]

Average Annual Total Returns as of Quarter-End 9/30/14 (%)

QTR YTD 1 YR 3 YR 5 YR 10 YR 15 YR SINCE INCEPT. DATE
Opportunity -8.99 -6.24 3.79 24.81 14.61 9.00 12.21 12.82 11/19/1996
Russell 2000 -7.36 -4.41 3.93 21.26 14.29 8.19 7.93 8.09 N/A
Annual Operating Expenses: 1.17%