Interview with David Nadel PM Of Royce Global Select Fund And Co-PM Of Royce Global Value Fund

Royce Funds
David Nadel

Royce Funds are a family of approximately 20 funds devoted to small cap value investing. Nearly all the funds have far outperformed their indices (the Russell 2000), since their inception. The family of funds was started by legendary value investor Charles Royce over 35 years ago. The Royce Funds has recently opened a few funds devoted to international small cap value investing.

One particular fund that opened in 2005 is the Royce Global Select Fund (ticker RSFTX) managed by David Nadel. Here is some information about Mr.Nadel from

David A. Nadel is a Portfolio Manager for Royce & Associates, LLC, investment adviser to The Royce Funds. Mr. Nadel serves as Portfolio Manager for Royce Global Select Fund and the co- portfolio manager of Royce Global Value Fund. Mr. Nadel joined the firm in 2006 and previously was a Senior Portfolio Manager at Neuberger Berman Inc. (2004 to 2006) and a Senior Analyst at Pequot Capital Management Inc. (2001 to 2003). He was also named to the 1999 and 2000 Institutional Investor All-American Research Teams. Mr. Nadel holds a bachelor’s degree from Williams College and a master’s degree from Harvard University, as well as a Master of Business Administration from Harvard Business School.

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Royce Global Select Funds has a spectacular record. The fund has a five star rating from Morningstar. Below is some data regarding the fund’s returns:

Average Annual Total Returns

As of Quarter-End 12/31/09

4Q* YTD* 1YR 3YR
RSFTX 10.57% 56.11% 56.11% 6.57%
Russell 2000 3.87% 27.17% 27.17% -6.07%
MSCI World Small Core 2.83% 44.12% 44.12% -5.49%

Since Incept
RSFTX 12.52%
Russell 2000 0.85%
MSCI World Small Core 2.72%
Annual Operating Expenses


David Nadel also co-manages Royce Global Value Fund. The Royce Global Value fund (ticker RIVFX) like the Royce Global Select Fund has a phenomenal record. It has a four star rating from Morningstar. Below is some data regarding the fund’s returns.

As of Quarter-End 12/31/09

4Q* YTD* 1YR 3YR
RIVFX 9.01% 61.89% 61.89% 3.59%
MSCI World Small Core 2.83% 44.12% 44.12% -5.49%

Since Incept
RIVFX 3.58%
MSCI World Small Core -5.48%
Annual Operating Expenses

Gross Net
2.27% 2.02%

Mr. Nadel was kind enough to speak with me about the two funds he manages. Below is our conversation.

I would like to thank Joanne Newgard the Director of Advisor Services and Media Relations at Royce & Associates for arranging this interview.

There are many types of value investors who use different metrics such as P/B, P/E, looking for situations that causes forced selling’s among institutions. What do you use to evaluate a stock?

For most sectors I feel return on capital is the single best metric to judge how much value a company is creating for shareholders. If a company’s return on its capital is paltry, particularly if it falls short of the cost for that capital, than essentially not much can redeem that business in my eyes, not even spectacular growth. In Royce Global Value and Royce Global Select, we hold companies to a fairly punishing standard on this. We look for companies with sustainable returns on capital of 25% or more. At the same time, value-creating companies should ideally be self -funding. So, we like companies with equity-heavy balance sheets that generate enough cash to not only fund their operations internally but also to take market share during market downturns from their debt-laden competitors. Lastly, we are fans of Warren Buffett, so we look for businesses with a strong “moat” protecting them from competition.

We are not catalyst- driven traders. We are not attracted to turnarounds, or blue-sky stories. We just try to invest in quality and try to invest at a discount to what we believe it is worth.

In regards to the schools of investing, value investing has many different subcategories. I would say Benjamin Graham and Warren Buffett have very different styles. Which investor would you say has had the greatest impact on your investment style?

I have been fortunate to have a number of helpful influences. Two which spring to mind are my father who taught me to avoid debt, to trust gold more than paper money, and to stick to my studies because education provides a more certain return on investment than anything else! And Chuck Royce from who I learned the value of patience, as well as many important principles for valuing the strength of business models.

Both Royce Global Value Fund and Royce Global Select have a high concentration in the natural resource sector. Given the massive increase in natural resource stocks, what value are you finding to explain such a large allocation of the fund’s assets to this sector?

In general we are concerned with what appears to be an addiction to on the part of the US and EU governments to printing money, which unfortunately tends to debase their currencies. While there seems to be a limitless supply of paper money these days, there is a finite supply of natural resources- especially precious metals such as platinum, silver and of course gold. Over the next year or so I think you may see the better mining companies such as the mid-tier South African platinum producers, and the London-listed silver producers evolve from being asset plays to actually being valued on cash flow and earnings.

The other side of our natural resource commitment is energy service companies, many of which are based in Canada. Canada has been a consistent innovator in energy technology. These companies compete globally and although they are very cyclical at least they have strong balance sheets to cushion the cycle.

Royce has been invested in precious metals and other natural resources for over a decade now. There was a time people looked at us as if we were slightly nutty for this; I think that skepticism will fade. Gold is catching the attention of some of today’s shrewdest investors: John Paulson launched a gold fund, and David Einhorn and Dan Loeb often sing its praises. The other precious metals will start to be embraced by more investors, I think.

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I wrote an article regarding the large decline in BRIC stocks during the financial crisis and their subsequent returns since their trough. The BRIC indexes are still far below their highs reached in 2007. Are you finding any value in these countries?

Yes. What’s remarkable about the economic crisis is how much less relevant it was fundamentally to the BRIC markets than it was to the US and Western Europe. Sure the interruption of global capital flows and the capitulation of US consumers did have a very damaging short-term effect on the BRIC countries. But these countries are evolving quickly and their consumers are becoming a force to be reckoned with. In India, discretionary spending has gone from 35% of household consumption 15 years ago to 65% today. They added 125 million mobile subscribers last year. Their middle class is ballooning. So the fact that BRIC markets are below pre- crisis levels continues to create opportunities with us. Of these four markets we are focused mostly on China and Brazil and ramping up our commitments to India.

Jim Chanos recently made headlines with his prediction about a massive bubble forming in China. Do you have an opinion on the matter, and if so how does this effect your investment decisions in China and Asia in particular?

Yes, there sure has been a lot of hand-wringing about China as of late. And it has even become fashionable to compare China today to Japan two decades ago- both being seen as export driven Asian economies with excess savings and a reticent, cautious consumer. Sure there are signs of a bubble in China- the A-Share market is a bit of a Wild West, and housing affordability looks strained for the average person. But I think maybe Jim Chanos and the other China bears are missing some key differences. For one, the Chinese are becoming real consumers; retail sales are climbing at a high-teens pace annually. And China last year became the world’s number one passenger-car market. Perhaps more importantly, unlike our consumer bubble, Chinese consumer power isn’t dependant on easy credit. Only about a quarter of car purchases involve a loan, and average loan-to-value on home purchases is running at only 45% or so. In fact about a quarter of Chinese homes are bought for cash.

We have been orienting Royce Global Value and Royce Global Select towards the Chinese consumer- their future consumption needs involving healthcare, education, food, luxury goods and even money management. I think this will be one of the big surprises over the next two to three years- the increasing importance of the Chinese consumer and the decreasing importance of exports.

With the rise of the emerging markets as a larger percentage of world’s GDP, how important do you think it is that American investors gain exposure to emerging markets?

It is extremely important. The wealth transfer from the West to the emerging markets is arguably the most important investment theme of our age. The developed markets are ironically the most troubled parts of the world economically, and investors simply can’t afford to be exposed too much to the developed world with all its problems. I am not advocating selling all your US holdings and pilling into emerging markets when they are hot. Nor would I recommend committing more than a tiny portion of your investment dollars to the so called “frontier markets” in which Royce Global Value does not invest.

But when it comes to the “mainstream” emerging markets like the BRIC countries, South Africa and the Gulf States, we are really talking about economic champions. These are really the elite countries that are busy growing, rather than licking their wounds like we are. I think any long term investor should look to have 10-30% of their equity assets invested in these economic champions, with that number being towards the high end of the range exactly when all the talking heads on the TV channels are advising to cut risk!

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Changing exchange rates can have a large effect on returns of foreign equities. Do you hedge for currency risks?

No. Sometimes I wish we did! But overall I think our investors want that exposure and are smart enough to figure it out.

Do you have an opinion about the dollar and future exchange rates?

I am not a dollar bull. I do not think we are in for a normal recovery. The consumer is just too burdened: consumer deleveraging is in the early innings, and companies are either not hiring at all, or re-hiring at sharply reduced wages. Against this backdrop don’t rule out the possibility the government starts entertaining ideas for another round of stimulus, and that would mean more money printing and more currency debasement. At some level politicians can’t help themselves; money printing is like political catnip!

In fairness, the money printing mindset is not unique to the American government and the dollar, the EU is guilty too. So the point isn’t so much what the euro-dollar cross or pound-dollar cross will be. Those currencies are all troubled to varying degrees. It is more about which currencies might have a brighter future and I think that is a short list. It might be the Norwegian Krone or the Canadian Loonie because both those countries have natural resources the world wants and in general their economic house is in order. Or maybe it will be Singapore dollar. So much of the world’s wealth is being created in Asia. Ten years from now Singapore may be a money center like Switzerland once was. But to be clear we are stock pickers not currency speculators. We don’t organize Royce Global Value or Royce Global Select around currency bets.

To read the full interview look at my column on by clicking here

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