Bill Hench: Maintaining a Consistent Portfolio Approach by Royce Funds
A conversation between Bill Hench and Dave Gruber.
Maintaining a consistent portfolio approach—even during times when our style of investing may fall out of favor with the market—is a critical element of the Royce philosophy.
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Dave Gruber: Buzz Zaino has managed portfolios with a very disciplined approach since the late 1970s. You’ve worked with him for the last 12 years here at Royce. Walk us through the philosophy and process that the two of you use in managing the portfolios.
Bill Hench: The philosophy is simple. We want to get very good returns over the long period. Obviously in small-cap investing there are certain risks that are unique to that part of the market, so we want to make sure that we get paid for that risk.
The process has been the same for as long as we have been running the fund. We try to buy very cheap stocks, or as we say, statistically valid for a value fund. So we buy companies that are cheap based on book value and price to sales, and we try to see if over time—and by over time I mean a year and a half or two years—that can be corrected where they become stocks that are, again, starting to be recognized as potentially growth stocks, and therefore trade at a higher multiple. And what we have found over time is that if you could do that, you can get very good appreciation of stocks and very good performance over the long term.
Dave Gruber: There are four themes that you have for the portfolio. Could you walk us through those four themes?
Bill Hench: The four themes are essentially all turnarounds, but we further define them as asset plays—some people would call those sum-of-the parts valuations; turnarounds, which in most instances involve a new management team on an existing bunch of assets; undervalued growth stocks, which are really companies that are growing in sectors or parts of the economy that you wouldn’t necessarily think of as growth areas; and lastly we have interrupted earnings, which in many times are broken IPOs or companies that have fallen below the price that they came public at.