Portfolio Manager Bill Hench explains his deep value strategy’s ongoing strength and how he finds opportunities name by name.
What's worked so far this year for Royce Opportunity Fund?
This year has been a continuation of what we saw in 2016, and that’s to say that technology has been very strong: semiconductors, semiconductor capital equipment, anything where unit volume is important.
With the S&P 500 falling a double-digit percentage in the first half, most equity hedge fund managers struggled to keep their heads above water. The performance of the equity hedge fund sector stands in stark contrast to macro hedge funds, which are enjoying one of the best runs of good performance since the financial crisis. Read More
In other words, not so much new products however, but devices going into existing products and follow-up products. The industrial part of the market has been very good for us. We've had fortune not only in metal benders, traditional, old economy names, but also in some of the material names as well. You've really seen a thinning out of some excess inventories in things like aerospace, and that's helped.
Where are you finding new opportunities outside of technology?
New areas, you know the traditional value areas that you look at in an economy, in a market like this, are retail, some energy. But with us, it's not so much sectors; it's name by name by name.
Some opportunities we found recently were in the energy area. There were a fairly large amount of companies, both on the E&P side and the service side that were forced into bankruptcy when you had the sudden, severe shift in the energy price. We were able to buy some very good companies at very, very good valuations, as they emerged from bankruptcy, with a better balance sheet.
So, energy, both on the E&P side and the service side are two things that are working out as far as new places for us to look.
Why get into the deep value portfolio now?
So, there are still opportunities in this market. And, if you look at our portfolio at any given time, there is a large percentage of material amount of the stocks in our portfolio, even in the best markets, are not having a good year, or not having a good quarter. There is a constant rotation to this portfolio. So, even when things are great and we're selling lots of names into the strength, we're also adding names that aren't working currently.
The same can be said when the market is doing horribly, right. When we need cash we're always going to have a small amount of names, even in the worst market, working out well, or having some success. And we take that cash and we deploy it as best we can.
But that rotation, that is natural to this type of strategy, it always supplies us with the names that aren't yet mature. So, there's always a percentage of the portfolio, I think, that has promise in it to give you performance in the future.
Why do you think your deep value approach works particularly well in the small- and micro-cap space?
It works really well because of the liquidity, or the lack of liquidity. There are just fewer eyes looking at it. There are restrictions. People won't look at certain market caps that are below X. They won't look at certain stocks that aren't $10 or $5, or what have you. There are more than a handful of biases against that asset class.
But that doesn't mean that the assets there, or the companies that are the managements there, aren't good. It means they're just not appreciated. And when you're in this part of the market, that could be a significant opportunity, and traditionally, it remains such.
Article by Bill Hench, The Royce Funds