Portfolio Manager Bill Hench on 2016 performance for his deep value strategy.
Watch the video here.
Deep Value Strategy
Our performance in the current year is really influenced by what we did in the prior years. So, in this case, last year we had a fair amount of names that were disappointing. And if you look at the Russell 2000 in general, most of the names didn’t have a great year.
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But what we tend to do in those bad years is really accumulate positions or stocks that we like at very, very good prices so that when the things that need to happen for them to work, whether that be a management change or just a change in their environment or a change in the sector, when those things happen, we tend to get paid in that following year.
And that’s where we are right now. You’ve got a lot of companies really executing against a plan that they developed over the last year and a half, two years. You’ve got an economy that’s helping us, a little bit on the top-line, but mostly its companies just benefiting from better margins.
Turnarounds and Broken IPOs
About a third of the portfolio at any given time is made up of what we’d call turnarounds. Many of those are new managements on an existing base of business. And if you look throughout the portfolio, some of the best names that we’ve had, things like Spartan Motors, where a new management has come in and really sort of taken a look at how their operations could be improved, and they’re executing on that plan, so that stock has done very well.
We’ve also had a fairly large amount of IPOs that we bought post their introduction into the public markets where they may have fallen on some hard times in the short term, but where we thought that could be turned around in a pretty quick manner. And we’ve had some excellent winners there as well, like Amber Road, A10 Networks and Aerohive have all contributed.
Article by Bill Hench, The Royce Funds