Chuck Royce on the Opportunities and Elements of Micro-Cap Investing
The micro-cap universe—which we define as companies with market capitalizations below $750 million—has evolved significantly since President and Co-CIO Chuck Royce first took notice of the segment in the late 1980s. As of June 30, 2013, the U.S. micro-cap asset class consisted of more than 3,170 companies with more than $500 billion in total capitalization.1
“We came to the conclusion that the asset class of small-cap was really a much bigger and broader universe than just a simple one class setting,” says Chuck. “We decided that and we tested this to see if return patterns were different, and we came to the conclusion that they absolutely were,” he adds.
Beside market cap, there are distinguishable characteristics that set the asset class apart, including less liquidity and greater volatility than its small-cap and mid-cap peers. Despite what many investors might consider as off-putting appearances, we believe that micro-caps offer greater return potential and present evergreen opportunities.
“We’re looking for the sort of least volatile financial characteristics—very strong, low-leverage characteristics—and we take advantage of the volatility in the stocks themselves by buying in a very careful manner,” says Chuck about how our investment process centers around risk management and a long-term approach that focuses on achieving above-average absolute returns.
Another attractive quality that we see inherent in micro-caps is the abundance of companies that the universe offers through IPOs, spinoffs of larger companies, and what Chuck likes to call “fallen angels,” or higher market-cap companies that drop down into the asset class.
At Royce, we have a very broad look at micro-cap and have wide exposure to the asset class both domestically and abroad. While some of our core offerings—such as Pennsylvania Mutual,Total Return, and Heritage—have elements of micro-cap in their portfolios, we also have several dedicated micro-cap products:
Royce Micro-Cap Fund – Managed by Jen Taylor since 2009 (co-manager 2006-2008 and assistant portfolio manager 2004-2005), with assistants Whitney George since 2009 andBrendan Hartman since 2013.
Royce Micro-Cap Discovery Fund – Managed by George Necakov since 2003 and Jim Harveysince 2010, with assistant Chuck Royce since 2010.
Royce Capital Fund – Micro-Cap Portfolio – Managed by Jen Taylor since 2010 (co –manager 2009-2010, assistant portfolio manager 2003-2009), with assistants Whitney George since 2010 (manager 2002-2009) and Brendan Hartman since 2013.
Royce Micro-Cap Trust (a closed end fund) – Managed by Chuck Royce since 1993, with assistants Chris Flynn, Jenifer Taylor, and Jim Harvey since 2009.
Royce International Micro-Cap Fund – Managed by David Nadel since 2010 with assistants Jen Taylor and Jim Harvey since 2010.
Important Disclosure Information
The thoughts and opinions in the video are solely those of the person speaking as of August 12, 2013 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. 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).
1Data provided by [i]Reuters as of 6/30/31