Collecting High-Quality Stocks For The Long Term by Royce Funds
Royce Premier Fund, which has more than 20 years of history, represents the firm’s highest conviction stocks. CEO Chuck Royce talks with Co-CIO Francis Gannon about how the portfolio is constructed and some of the characteristics prevalent in the portfolio today.
See the video here.
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Francis Gannon: What do you think investors should expect from Royce Premier Fund going forward?
Chuck Royce: Premier represents our highest conviction stocks: very high-quality stocks that we believe have a long-term future in some sort of compounding way.
Francis: I’ve noticed that the return on invested capital, the weighted average return on invested capital for the Fund, is going up. It was up year-over-year dramatically in the latter part of last year.
Chuck: Well, the new stocks that we’ve added have high returns on capital.
Francis: And what about valuation today in some of these companies? Are you finding those type of companies at the valuations you would like?
Chuck: We will often start a position in a non-ideal valuation moment and then we’re prepared to add to the stocks as valuation improves.
Francis: So take us through that a little bit. There’s a journey that these stocks go through on their way from being owned in other portfolios here to Premier. How does that occur and what’s that process like?
Chuck: Most, if not all, of the stocks have been owned in this firm for some time in another portfolio. So we have a very long history with the company. We have come to grips with what we think the company stands for, and how we should look at it. We’ve come to understand the valuation that is likely to be demonstrated by that kind of company, and we then elect to own it in Premier. We’re going to take a very long-term view in Premier. We fully understand that the average purchase price has to be at a very strong valuation level.
Francis: How do you think about managing risk in a concentrated small-cap portfolio?
Chuck: This is a portfolio in the 60-70 stock range, and therefore our largest positions are in the 300 basis point range. Our smaller positions are in the 50-75 basis point range. Although it’s concentrated by our definition, it isn’t hyper-concentrated.