Chuck Royce: How Are We Responding To This Challenging Period? by The Royce Funds
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Continued from part one... Q1 hedge fund letters, conference, scoops etc Abrams and his team want to understand the fundamental economics of every opportunity because, "It is easy to tell what has been, and it is easy to tell what is today, but the biggest deal for the investor is to . . . SORRY! Read More
Chuck Royce: By and large we are not changing our strategy at all, and I want to make that very clear. We have clarified roles. We have strengthened our teams, especially in the micro area—we have broadened that team and hired a few people.
Francis Gannon: The underlying process, in general, hasn’t changed at all. In terms of what we do and how we do it, our process has held us in very good stead for a very long period of time—going back to when the firm was first founded back in 1972.
What we did do is take a strategic eye to how all of our teams tend to operate. We’ve added some talent, we’ve added some analyst help, we’ve better quantified the teams, and then we’ve narrowed peoples’ focus in terms of their actual expertise in what they do and let them do that even better.
Chuck Royce: We’re always learning in this business. I think there are aspects that are different that require a sharper focus. I think as a firm we were underinvested in the healthcare area, even though biotech probably wasn’t going to be a core competency for us. But I do believe we could have invested deeper in that area. This has been a wakeup call on that. In the other areas, we know we avoided the lower-quality companies, and I’m not sure we would change that.
Francis Gannon: We’re an active manager who embraces being an active manager. Our process has certain biases to it that we have to embrace in many respects, and so we’re not going to be involved in certain aspects of the market.
We are, though, an active manager who also deconstructs themselves, not only the companies and industries that we look at, but our own performance on a weekly, yearly, monthly basis. Are there things that we could have done differently? Perhaps. But at the end of the day, with what has happened over the sequence of time really since the market bottom, be it the low-leverage rally, be it the non-earners rally, be it the very concentrated performance of the market from the biotechnology area or even the bond-like proxies in the equity space, those are certain areas of the market that we typically would not have been involved in.
We’ve debated heavily internally—what is normal going forward? For us to live in a world where you have an economic period now of pretty moderate growth, low inflationary environment, you have earnings growth of about 10% for small-cap companies, revenue growth anywhere between 6-7%, seems to be the estimate these days. We think it’s a pretty interesting time to be looking at the small-cap space, particularly our part of the overall market, because there are some valuation discrepancies.
All of the premium in the market is being driven by these lower-quality areas, and it is really setting up a wonderful period from a value proposition. And why look at The Royce Funds today is the fact that we have these great portfolios of higher-quality businesses that we think are trading at a substantial discount to the overall market, in a world where people are forgetting about risk.