Portfolio Manager Steven McBoyle on what worked in our quality—or “premier”—strategy in 2017 and what may be in store in 2018.
What’s your perspective on Premier’s performance in 2017?
Well, we’re certainly pleased that we had a strong 2017. I think we take solace in the fact that it was predominantly driven by stock selection, which we always like to see. We also really had a decent year in 2016. So you know, the former being a growth led year, with the latter being a value led year. So very, very constructive to see Premier outperform for two years now, both in a value and a growth led market. We have had a lot of gains. So we had the opportunity to harvest those, recycle them, back into again, as we always do, trying to find the next generation, the emerging Premier type companies that we’ve been working on in our pipeline for some time. So we’re finding new names, and we’re having the opportunity to harvest some gains.
What do you think will surprise investors in 2018?
Allow me to say up front, forecasting surprises is a dangerous sport. As I like to say, he who uses a crystal ball will most certainly eat shattered glass. So now having said that, as I look to 2018, what am I fearful of? I think inflation could surprise to the upside. Again, as we know, risk assets generally don’t see multiple compression until inflation is in and around four percent. So inflation at this point in time looks manageable. But I do question whether we’re stressing the system. And why do I say that? Because as we sit here today, wage rate inflation is apparent. We have a material shortage of skilled labor. We are seeing commodity prices increase. And if you look at the actual underlying ISM operating rates, across the board, very, very strong. So we know that rates and inflation will increase as the economy improves. And that is a productive outcome, constructive particularly for Royce’s overall approach and strategies. But I do fear that we’re underestimating how quickly inflation will rise.
Article by The Royce Funds