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Royce Funds Interview - Risk-Oriented Approach to Micro-Caps
Posted by: Holly LaFon (IP Logged)
Date: September 4, 2013 04:35PM
In a market environment that has favored high-yield investments more than it has companies with strong underlying fundamentals, risk-oriented approaches such as ours have languished. Portfolio Manager Jen Taylor talks about how we try to mitigate risk when investing in micro-caps and how, despite the current market, we stick to our discipline.
“I think the Royce advantage in micro-caps really has a lot to do with focus and a lot to do with so much history in looking at this category, particularly through so many cycles,” says Jenifer Taylor, manager of Royce Micro-Cap Fund and Royce Capital Fund – Micro-Cap Portfolio and assistant manager of Royce International Micro-Cap Fund and Royce Micro-Cap Trust, a closed-end fund.
At Royce, we began to take notice of the micro-cap segment in the early ‘90s, not long before the small-cap sector began gaining more institutional acceptance and the universe’s cap size started to expand. During this time, we also observed that the small-cap market was bifurcating into two distinct sectors based on capitalization: the upper tier of small-cap, which today encompasses companies with market caps between $750 million and $2.5 billion; and the lower tier, which includes companies with market caps up to $750 million that we refer to today as micro-cap.
Considered today as a professional asset class, though still underfollowed in our opinion, small-caps benefit from a higher level of institutional focus. In contrast, micro-caps more closely resemble the small-cap space before its acceptance as a professional asset class: a volatile, inefficiently priced, not always researched sub-set often underappreciated and misunderstood.
As risk managers, the characteristics of the micro-cap asset class were highly attractive to us. While less liquid and faced with more trading difficulties than small-caps, we believed that micro-caps offered greater return potential and were best suited for long-term investors like us. Taking into consideration the inherent risks of this evergreen sector, we began developing a broad diversification strategy—still in practice today—that we believed would appropriately address the asset class’s volatile behavior.
Our approach to the micro-cap category centers on companies that have strong balance sheets and high returns on invested capital. In an environment starved for growth, investors’ preference for high-yielding equities has put investment approaches such as ours out of sync.
“We want to make sure that they’re in a position to survive unexpected downturns or mishaps,” says Jen. “What has gone underappreciated and what has yet to be discovered I think in our asset class is the real strong underlying business,” she adds.
See the video here.
Important Disclosure Information
The thoughts expressed in this video are solely those of the person speaking and may differ from those of other Royce investment professionals, or the firm as a whole. There can be no assurance with regard to future market movements.
This material is not authorized for distribution unless preceded or accompanied by a current prospectus. Please read the prospectus carefully before investing or sending money. Micro-cap, small-cap, and mid-cap stocks may involve considerably more risk than investing in larger-cap stocks (please see "Primary Risks for Fund Investors" in the prospectus).
Guru Discussed: Chuck Royce: Current Portfolio, Stock Picks
Stocks Discussed: SPY, DJI, QQQ,
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