“Essentially, we are interested in three things—a strong balance sheet, a record of success as a business, and the potential for a profitable future.” — Charles Royce
Background & Bio
Charles M. Royce is President and Co-Chief Investment Officer of Royce & Associates, LLC and President of The Royce Funds, a position he has held since 1972.
Charles Royce, also known as Chuck, serves as Portfolio Manager of Royce Pennsylvania Mutual, Total Return, Heritage, 100, Financial Services, European Smaller-Companies and International-Smaller Companies Fund, as well as two of the firm’s closed-end portfolios, Royce Value Trust and Royce Micro-Cap Trust. He also co-manages Royce Premier Fund with Whitney George, Royce Select Fund I with Lauren Romeo, Royce Select Fund II with James Harvey, Royce Dividend Value Fund with Jay Kaplan and both Royce SMid-Cap Value and SMid-Cap Select Funds with Steven McBoyle. He has 46 years of investment experience, with 36 years as a smaller-company value portfolio manager.
Prior to 1972, Mr. Royce served as the Director of Research at Scheinman, Hochstin, Trotta, and as a security analyst at Blair & Co. He received a bachelor’s degree from Brown University and earned a Master of Business Administration degree from Columbia University.
Royce is a small-cap specialist and uses a bottom-up approach to investing, especially in the international market. While he calls himself a value investor, he dislikes using the word. Instead he likes to say that he is a risk manager. Essentially, Royce is targeting outperformance with a lower than average level of risk. And he has achieved this with an annualized return of just under 15% for the 35 years from 1972 with a lower level of volatility than the market average.
Whenever Royce and his analysts are assessing an investment, they start with a risk analysis, what can go wrong, what is the possible downside here? They factor in things like cash balances, leverage and the business model — are there competitors, barriers to entry etc…?
When he first encounters an investment, Royce compares the risk/return ratio. He focuses on absolute returns, comparing the potential return to the risk involved in buying the stock. After these questions have been answered, Royce and his team move onto the potential returns that can be achieved. Royce and his managers are looking to achieve returns of 100% over a three to five year period for each investment, with minimal downside and reduce risk, as well as low volatility.
Royce views every business as if he were a private equity buyer, looking to buy and hold forever. There’s an emphasis on sustainability and stocks that are compounding machines, not just short-term trades. Simple business models are key without a lot of leverage. That said, Royce rarely holds forever. His average holding period is in the region of four to five years and his portfolio turnover is around 25%. The most common reason for Royce to sell a stock; change in business strategy.
And stocks like this are easy to find in the small-cap market. Indeed, the size of the small-cap universe means that there are plenty of opportunities. Royce is studying over 25,000 domestic and international companies there are always opportunities, new entrants, spinoffs and dropdowns, plenty for Royce to take advantage of, that’s why he’s stayed with small-caps.
Royce has always liked financials, although not banks. Financial companies like stock exchanges, wealth managers etc. Royce is always on the lookout for dividends. He believes the term ‘cash is king’ is now out of date, instead, dividends are the new cash while interest rates remain low.
For more than 40 years, Royce & Associates, investment adviser to The Royce Funds, has used a disciplined, value-oriented approach to select micro-cap and small-cap companies.
- Chuck Royce, the firm’s founder and a pioneer of small-cap investing, enjoys one of the longest tenures of any mutual fund manager
- Approximately $32 billion in total assets under management as of 12/31/14
- Seasoned staff of over 30 investment professionals
- Our officers, employees, and their families have approximately $185 million invested in The Royce Funds as of 12/31/14.
Chuck Royce, Director of Research at a small Wall Street firm, bought Quest Advisory Corporation and gradually assumed management of Royce Pennsylvania Mutual Fund in 1972. It was an opportune time for a young investment manager with a new approach: value investing in small-cap stocks.
Losing substantial amounts of money led some to the idea that safer, more stable investments were preferable. While today’s investors have been flocking to bonds and money market funds, the years preceding 1973 saw a marked preference for larger, higher-profile stocks on the idea that they were less risky and more likely to be profitable.
The result was what has come to be known as the “Nifty Fifty” market, in which a small group of large, mostly multinational firms would usher in a Golden Age of risk-free high returns. It was not the first or the last time that dreams of investment Utopia seduced some while cooler heads in the market shook in bemusement. And of course not all investors were ready to abandon small-cap stocks even as a sizable consensus held at the time that the safest and surest route to growth was via blue-chip names.
However, by the end of 1973 the “Nifty Fifty” had gone bust, while the U.S. economy entered a period of stagflation, in which inflation and recession inflicted such a high degree of double unhappiness that a new economic indicator was born—the Misery Index. Investor confidence was rapidly eroding, a process made worse by the Vietnam War, Watergate, and nationwide gas shortages, all of which combined to throw the country into a trying period of self-doubt.
During this confusing and difficult epoch, the cornerstone of Chuck’s investment philosophy began to take shape. Two insights were crucial for developing the disciplined approach that we still use today. First was the idea that preserving capital was as critical to successful long-term growth as growing it. An investment approach that lost less during downturns and remained competitive in more bullish periods could provide very strong absolute returns over periods of three years or more, while also being likely to best its benchmark over these same long-term time spans. The second insight was that such an approach could work in the small-cap asset class. Indeed, it could potentially work more effectively there than in other asset classes because of the inefficiency and related lack of institutional attention paid to smaller companies.
By mid-1974, Chuck found himself among a small handful of managers who were willing to invest primarily in lesser-known, small- and medium-sized companies (as they were often described then). This was an asset class where few others believed that conservatively capitalized, financially strong companies existed. Bucking the consensus view, Chuck sought out small-caps with attractive balance sheets, high internal rates of return, the ability to generate free cash flow, and long-term earnings records…
…Soon after the Internet Boom went bust, styles like ours became suddenly fashionable. Other investors very quickly re-discovered the merits of strong balance sheets, established records of earnings, and free cash flow—traits that we, needless to say, had never forgotten or stopped searching for.
Arguably our most challenging decade, these years were distinguished by the extraordinary Internet bubble, the horrific events of 9/11, a real estate crash, and the worst global financial crisis since the Great Depression. In something of a paradox, this period also saw the greatest asset growth for the firm as we moved from total assets under management of $2.5 billion on December 31, 1999 to $35 billion on December 31, 2009. Other changes were equally significant.
The emergence of distinctive performance patterns for small-cap and micro-cap stocks first began to play a major role in the way that we structured portfolios and thought about the small-cap world as a whole in the 1990s. In the ensuing decade, there were two major developments. First was the acceptance of small-cap investing as a professional asset class, especially on the part of institutions.
The second major development was internal. As a firm, we began to devote more time and resources to non-U.S. companies. The number of opportunities in micro-cap and small-cap companies across the globe is increasingly vast, with more companies to choose from and greater total market capitalization than what exist in the U.S. We believe that these factors present substantial opportunities to find quality businesses that are mispriced. In addition, the global marketplace generally offers higher dividend yields—an important component of total return…
…In such an unprecedented time, patience is especially critical. Indeed, the ability to be patient is probably the single most important quality that an investor who seeks strong long-term returns can possess. It is easy to talk about the importance of patience and discipline when markets are solid and portfolios are doing well. Yet at some point these things will change—and both will be tested, as they have been in this market. It has been a very difficult time, but we believe it is passing. When it finally does, our disciplined approach will remain and, we believe, be effective.
As we celebrate 40 years of small-cap value investing, we look back at what we have seen. Through all manner of markets—many of which were thought to establish a “New Normal”—we have never wavered in our convictions. We still believe that equities remain the best way—maybe the only way—to beat inflation and build wealth over the long term. We are confident that we can create portfolios that can grow commendably, especially in the more historically typical market climate that we believe we saw in the second half of 2012.
Royce Funds Performance
Royce Funds Insights
- Surprises in 2014 and Expectations for 2015
- Chuck Royce on 4Q14: Positioning for a Normalizing Economy
- When Volatility Rises, So Have Active Management Results
- Investing During Turbulent Markets
- A Healthy Skepticism is Key to Managing Risk
- What is a Deep Value Investor?
- Avoiding Value Traps and Aggressive Growth
- Will Active Stock Picking Be More Relevant in 2015?
- Royce Opportunity Fund: Looking for Success in Turnarounds
- Small-Cap: The Evergreen Asset Class
The whole list of Royce Fund market insights can be found here.
“Our first job is don’t lose the money.”
“We are not anti-growth. We are just anti-overpaying for growth.”
“We spend a lot of time measuring financial risk… We’re very debt-averse, positive-cash-flow-oriented, high-returns-on-assets-oriented.”
“You have to buy into the idea that the company has a sensible business strategy. We want to be damn sure that a company is not doing something either stupid or ill-conceived.”
“I personally don’t think that meeting eyeball-to-eyeball with the CEO is necessarily going to get you anywhere. What you really want to do is complete your homework, get all your questions in mind and start getting your questions answered by a whole set of different means – and interviewing the CEO is only one of them. You want to talk with suppliers and other people who have known management for a long time… You want to know other ingredients besides just the facts.”
“Theoretically, we would buy a large position at the right price. But that is unlikely. It is rare for us to develop a high level of confidence in a short time, because we review and review the stuff. In general, we are gradualists.”
“The theory is that this is a historically inefficient area, that there’s less broker research, there’s less institutional interest, that people tend to sort of come and go and it sets up tremendous opportunities from time to time, and that over the long term, possibly, you can get a higher return, maybe in a hundred basis points or more.”
“We don’t want to take balance sheet risk, we want to take operating risk. We don’t want to take the risk of the enterprise not having enough fuel to last for the operating cycle.”
“The truth is that we can’t control everything, but we have a very disciplined approach to the stocks we buy. The balance sheet is probably the single most important thing we are looking at.”
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- Royce likes precious metals; shy of financials
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- The best stocks to buy now
- Not Much Dazzle for Kids Funds
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- Bear Market Winners
- Fund manager Royce simply isn’t afraid of bears
- Chuck Royce’s Counsel On Small-Caps–Be Patient
- MUTUAL FUNDS; Fund-Filled Holiday Shopping For Kids
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