Portfolio Manager Chuck Royce discusses why financials continue to play an important role in his portfolios.
What role do financials play in Royce Total Return Fund?
Financials have been overweight forever and I would imagine it will continue. Let's recall that Total Return must have dividend-paying stocks. That's its secret sauce.
Financials are obviously a very important sector in this country. We've never done it exactly the way the rest of the world does it, but we've always had a broad and deep involvement with financials.
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Describe your approach to this sector.
Our approach has been a non-traditional approach. We have probably used less banks for a variety of reasons over time. That's somewhat modifying currently, but we have always used traditional asset managers, capital markets–there's lots of interesting smaller, traditional asset managers, traditional capital markets firms. These are healthy, interesting areas, areas we can understand and we continue to use them.
What's your outlook on asset managers and capital markets firms?
We are using somewhat less traditional asset managers because of some macro concerns. We're using more alternative managers, and we're feeling quite comfortable that this is an undervalued zone and we plan to continue to use them.
The outlook for the M&A-type independence is very good. There's been an evolving trend away from the mega firms, away from Meryl Lynch, away from UBS, et cetera, to smaller, smaller companies that are really small-cap securities, many of them. They provide an asset-light setting that is very appropriate for investing.
What's your current view on banks?
We think we're entering into a very favorable period for banks where because of normalization of rates, primarily you're getting the opportunity to make real spreads.
Loan growth is accelerating, people are less hesitant about loaning and borrowing, and we think we're entering into a favorable trend.
We like banks that have either a niche, a sort of geographic niche, we like banks with fee income, we like banks with lots of insider ownership, banks that we can have confidence that are either acquiring appropriately or potentially being acquired.
Article By Chuck Royce, The Royce Funds