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Finding Value in More Economically Sensitive Sectors - Royce Funds Commentary
Posted by: Holly LaFon (IP Logged)
Date: February 18, 2014 01:38PM
Portfolio Manager Lauren Romeo talks about where she's been finding the most attractive valuations, positioning our portfolios to benefit from a more historically typical recovery, and the portfolio characteristics of Royce 100 Fund, which she manages with Chuck Royce.
"Royce 100 Fund is unique given that it has a particular focus on franchise or high-quality businesses, as well as the fact that it's relatively concentrated with a maximum number of 100 names in the portfolio.
Additionally, while Royce 100 Fund is at its core a small-cap fund, it does have a little bit of a broader fishing pond relative to other Royce quality-focused funds. Royce 100 Fund can invest in companies with market capitalizations up to $5 billion, which means not only can we take advantage of opportunities that may arise in the low end of the mid-cap market but also invest in micro-cap companies, which is a less efficient but very attractive part of the market that Royce has been investing in for decades."
"Over the past several years, we've been finding some of the most attractive valuations among quality companies in the more economically sensitive sectors. Our largest sector weightings are Industrials at about 29%, Information Technology at 25%, followed by Energy and Materials.
In the Industrials sector we own several machinery, equipment, and business services companies that dominate the particular niche that they operate in and are also well positioned to benefit from improved U.S. manufacturing activity, a rebound in commercial construction, as well as the eventual capital spending that's been postponed by companies over the past couple of years as a result of the tepid economic recovery that we've had thus far."
"A lot of our Industrial companies have done a great job controlling their cost structures, and as a result they're poised to have significant earnings leverage when the revenue growth does reaccelerate for them. Also, several of our Industrial companies have international exposure, so they should benefit over time from an eventual recovery in Europe as well as continued above-average economic growth in the emerging economies.
Technology is another space where we found a lot of interesting opportunities. We've actually found a lot of values in more traditional technology companies, such as semiconductor capital equipment."
"Energy services is another area where we're finding a lot of attractive valuations among companies that earn high returns from providing the key exploration, drilling, production, and processing technologies that are fueling the ongoing North American shale gas and oil revolution.
Historically, low-quality companies, defined as companies with very high levels of debt on their balance sheet and/or low returns on invested capital, have led small-cap performance in the early stages of an economic recovery. This cycle has been different in that low-quality outperformance has been much more prolonged."
"Given that economically sensitive sectors are the areas where we've been finding the most attractive valuations among quality companies over the past several years, we're optimistic about how our portfolios are positioned going forward."
Important Disclosure Information
The thoughts and opinions in the 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 currentprospectus. Please read the prospectus carefully before investing or sending money. The Fund invests primarily in micro-cap, small-cap, and mid-cap stocks, which may involve considerably more risk than investing in larger-cap stocks. (Please see "Primary Risks for Fund Investors" in the prospectus.) The Fund also invests primarily in a limited number of stocks, which may involve considerably more risk than a less concentrated portfolio because a decline in the value of any one of these stocks would cause the Fund's overall value to decline to a greater degree. (Please see "Primary Risks for Fund Investors" in the prospectus.) The Fund may invest up to 25% of its net assets in foreign securities, which may involve political, economic, currency, and other risks not encountered in U.S. investments. (Please see "Investing in Foreign Securities" in the prospectus.)
Guru Discussed: Chuck Royce: Current Portfolio, Stock Picks
Stocks Discussed: SPY, DJI, QQQ,
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