Three Takeaways About The Royce Funds For Advisors by Royce Funds
WealthManagement.com and Asset.tv caught up with Principal and Portfolio Manager Steve Lipper at this year’s Pershing INSITE conference in Orlando, Florida for a quick conversation about Royce’s outlook, our low volatility strategy that advisors are using today, and opportunities in the market that we are excited about.
Outlook for Small-Caps
At Royce Funds, we think that the next five years are going to be meaningfully different than the last five years in a number of ways that will have significant consequences as to how advisors build portfolios. Here are three key indicators we think advisors should keep in mind:
- We think that we’re going from an era where performance was led by P/E multiples expanding to one more led by earnings growth.
- We think we’re going from an era where financially oriented companies did better to one where operating results are going to matter more.
- We think we’re going from an era where interest rate sensitive companies and stocks did better to one where more economically sensitive areas are going to do better.
The extraordinary returns which we’ve had in the equity markets have been a result of earnings plus multiple expansion. We think that’s largely behind us. The consequence of that is while we’ve lived through a period of above average returns, we’re probably going to enter a period of below average returns. In this kind of environment, we think that small-caps are going to continue to lead large-caps because you’re going to have better earnings growth. We believe this is the type of environment we tend to perform the best in.
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Royce Funds Low-Volatility Strategy
What we find for advisors with high net worth clients is they need to be in small-cap stocks for an attractive part of the asset allocation, but they really want exposure to those that have reduced volatility. At Royce, we have a total return strategy that invests largely in dividend-paying stocks, which we believe helps to reduce volatility and the inherent risks associated with small-caps. Here’s why:
When smaller companies are paying dividends, they’re usually those that have more consistent profit streams and more mature business models. During turbulent markets, this total return strategy has consistently held up better than most other small-cap strategies. For those higher net-worth individuals, that tends to be more attractive.
We’ve been utilizing this approach for more than 20 years, and have seen our share of up and down markets. We believe this lower volatility orientation can be an attractive component in advisors’ portfolios.
Opportunities in the Smaller-Company Universe
We have a newer strategy run by a portfolio manager who also works on one of our oldest and best-performing portfolios. It’s called Micro-Cap Opportunity. It focuses on stocks that are below $1 billion in capitalization. We still regard the micro-cap asset class as inefficient and very lightly researched, and so it’s an area where we find a lot of opportunities that we get excited about.
Micro-Cap Opportunity is going to turn five years old this summer. We think it’s going to get on a number of people’s radar screens because it has very competitive performance since it launched.