Royce Premier Fund: Reviewing 2014 and Positioning for 2015 by Royce Funds
Portfolio Manager Lauren Romeo talks about the relative performance challenges for Royce Premier Fund and the types of businesses we are emphasizing and avoiding.
See the video here.
Steve Lipper: So now we look back at 2014 in terms of performance. It was an odd year in the market, particularly in the small-cap market, and there were some challenges that we had with Royce Premier Fund. What perspective can you share with us about that?
Lauren Romeo: 2014 was a disappointing year. We had a terrific first half with strong performance on an absolute and relative basis, but unfortunately we gave up those gains in the second half. The 50% plunge in the price of oil in the past six months, combined with renewed fears about economic growth in Europe and China, had a real negative impact on our holdings in Energy, Materials, and Industrials—three sectors in which we’re overweight.
Steve: There were some challenges in what we owned, but also perhaps in what we didn’t own. Can you perhaps address that?
Lauren: There are several businesses that lack the visibility and predictability of future cash flows that we look for in building conviction, or are excessively leveraged, so we tend to stay away from those businesses. Unfortunately, several of those were strong performing sectors in 2014.
One example would be Royce Premier Fund lacked bond substitutes, such as Real Estate Investment Trusts (REITS) and Utilities. Those sectors performed particularly well, given the 10-year Treasury rate declined almost 100 basis points towards the 2% level through the course of the year.
Steve: So looking at Royce Premier Fund and some of the things that we’ve been adapting in the portfolio, can you address things that we’re emphasizing more and perhaps some of those that we’re emphasizing less?
Lauren: More recently we’ve been decreasing our exposure to capital-intensive commodity businesses, such as metals & mining. We’ve also reduced our weightings in a few names where we have some concerns about the sustainability and visibility of future returns on capital. We’ve been replacing those with companies that have economic moat-like features, such as network effects, or intangible assets, such as a strong brand name.
Steve: So in some of the industries that we are overweighting, what’s our rationale for optimism?
Lauren: Well first, in general, U.S. economic growth has accelerated the past couple quarters and seems to be on a pace to continue to do so going forward, which is a benefit for small-cap companies as a whole given their businesses tend to be tied more closely to the U.S. economy.
We can look across the holdings in our Premier portfolio and find numerous companies that are poised for profit margin expansion as their revenue growth normalizes in concert with an improving U.S. economy.
We’ve seen a long-awaited uptick in corporate capital spending, as well as non-residential construction—both of which would be a benefit to several of our industrial holdings.
We continue to see favorable secular spending trends on semiconductor capital equipment, factory automation, and telecommunications infrastructure. So those should benefit several of our Information Technology holdings.
Steve: So on the consumer side, that might actually benefit from the decline in oil prices.
Lauren: It’s a great point. The decline in energy prices and gas prices ultimately acts as a tax cut for consumers, which hopefully will increase their purchasing power and willingness to spend, which, in turn, should help our consumer-oriented stocks.
Royce Premier Fund [RYPRX]
Average Annual Total Returns as of Quarter-End 12/31/14 (%)
| QTR* | 1 YR | 3 YR | 5 YR | 10 YR | 15 YR | 20 YR | SINCE INCEPT. | DATE | ||
|---|---|---|---|---|---|---|---|---|---|---|
| Premier | 1.01 | -0.86 | 12.17 | 12.09 | 9.27 | 11.17 | 11.98 | 12.04 | 12/31/1991 | |
| Russell 2000 | 9.73 | 4.89 | 19.21 | 15.55 | 7.77 | 7.38 | 9.63 | 9.86 | N/A | |
| Annual Operating Expenses: 1.09% | ||||||||||
* 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 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 and other expenses.
