Positioning Opportunity Fund for Long-Term Results by Royce Funds
Portfolio Manager Bill Hench sits down with Director of Consultant Relations and Client Service Jeff Smith to discuss how he positions his portfolio and why his expectations are high for micro-cap.
See the video here.
Jeff Smith: Bill, congratulations. You were recently featured by Money magazine as one of their top investment pros in their Investment Guide for 2015. Talk a little bit about Opportunity Fund and the performance we’ve seen.
Bill Hench: Thanks, Jeff. The Fund did very well over the last three to five years. A lot of that work is the result of the process that we’ve always employed at Royce Funds. We like to take advantage of the market, especially in the small- and micro-cap areas, when things are very cheap, and you did have a great period to do a lot of that work after the financial crisis.
So as always is the case with this Fund, our performance in any period is more determined on what we did prior to that period than what we actually did during that period.
Jeff: I’ve heard you say 2014 was a retooling year for the portfolio. Can you expand upon that?
Bill: That’s exactly right, Jeff, and what happened with the portfolio was that since we did have such a big run—especially the end of 2013—many of the names in the portfolio, especially the bigger names in the portfolio, bigger positions, had reached a price that we thought was fair, and as such, those names had to be replaced with new names that would hopefully drive performance going forward.
And so a lot of names that led to the successful numbers in that three- to five-year period were exited out of the portfolio or replaced with names that we hope we’ll talk about three to five years from now, that will provide some good performance there as well.
Jeff: What about micro-cap? About 40% of Opportunity Fund is invested in micro-cap stocks. What are your expectations for that asset class moving forward?
Bill: Micro-cap has been disappointing, at best, in the last year and a half. And as is always the case, there’s not a lot of coverage. There’s a lot of concern when macro issues come up as far as what’s growth going to do. But we think that the area is the cheapest part of the market, and our expectations are pretty high for that group.
There hasn’t been a lot of M&A activity. There hasn’t been a lot of attention paid to it, and there’s been a lot of concern about financing in it. We think those concerns are unwarranted, and we think that these prices really offer some great value.
Royce Opportunity Fund [RYPNX]
Average Annual Total Returns as of Quarter-End 12/31/14 (%)
| QTR | 1 YR* | 3 YR | 5 YR | 10 YR | 15 YR | SINCE INCEPT. | DATE | |||
|---|---|---|---|---|---|---|---|---|---|---|
| Opportunity | 6.15 | -0.48 | 20.52 | 15.31 | 8.14 | 11.60 | 13.00 | 11/19/1996 | ||
| Russell 2000 | 9.73 | 4.89 | 19.21 | 15.55 | 7.77 | 7.38 | 8.53 | N/A | ||
| Annual Operating Expenses: 1.17% | ||||||||||
*Not Annualized
Important Performance and Expense Information
All performance information reflects past performance, is presented on a total return basis, reflects the reinvestment of distributions, and does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate, so that shares may be worth more or less than their original cost when redeemed. Shares redeemed on or before 1/30/15 within 180 days of purchase, and after 1/30/15 within 30 days of purchase, may be subject to a 1% redemption fee. All redemption fees are payable to the Fund and are not reflected in the performance shown above; if such fees were reflected, performance would be lower. Current month-end performance may be higher or lower than performance quoted and may be obtained here. Operating expenses reflect the Fund’s total annual operating expenses for the Investment Class as of the Fund’s most current prospectus and include management fees, other expenses, and acquired fund fees and expenses. Acquired fund fees and expenses reflect the estimated amount of the fees and expenses incurred indirectly by the Fund through its investments in mutual funds, hedge funds, private equity funds, and other investment companies.
