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Royce Funds Commentary - A Theme-Based Approach to Small-Cap Investing

October 15, 2013 | About:
Holly LaFon

Holly LaFon

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Portfolio Manager Bill Hench talks about what he looks for in potential investments, how the recent housing recovery exemplifies some of his investment themes, and why he sees potential in retail as year-end approaches.

See the video here.

“What we like to do is get very good companies at very, very good prices,” says Portfolio Manager Bill Hench. “In order to do that, the companies that we buy usually have a problem. Usually it’s a short-term problem that we hope will get addressed over a year-and-a-half to two-year period.”

Exemplifying some of Bill’s opportunistic investment themes—which in addition to turnarounds include emerging growth companies with interrupted earnings patterns, companies with unrecognized asset values, and undervalued growth companies—is the recent housing market.

“A lot of [housing related companies] turned out to be asset plays where we thought that the land on the books and the cash were being undervalued by the market,” says Bill. “We had builders, we had financing companies, we had software companies, and, to a large extent, they all had the same characteristics: they had very, very low valuations and very, very low expectations going forward,” He adds.

Bill also believes that the recent story regarding retail stocks presents compelling opportunities. Because of earnings disappointments from some of the bigger U.S. retailers, valuations have become attractive.

“We think if you’re very selective, and you can find companies that have very good characteristicsas far as what they have to carry through the end of the year… it could be a very good area to invest for the year-end.”

Bill Hench joined the firm in 2002 and became assistant portfolio manager to Buzz Zaino onRoyce Opportunity Fund in 2004 before becoming manager of Royce Opportunity Select Fund in 2010.

Like Buzz, Bill’s stock selection process focuses more on a company’s ability to turnaround—from earnings misses, cost pressures, or industry- or company-specific issues—than it does on its balance sheet strength.

Important Performance and Expense Information

All performance information reflects past performance, is presented on a total return basis, reflects the reinvestment of distributions, and does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate, so that shares may be worth more or less than their original cost when redeemed. Shares redeemed within 180 days of purchase may be subject to a 1% redemption fee, payable to the Fund, which is not reflected in the performance shown above; if it were, performance would be lower. Current month-end performance may be higher or lower than performance quoted and may be obtained at here. Gross operating expenses for Royce Opportunity Select Fund reflect total gross annual operating expenses and include management fees, dividends on securities sold short, other expenses, and acquired fund fees and expenses. Net operating expenses reflect contractual fee waivers and/or expense reimbursements. All expense information is reported as of the Fund’s most currentprospectus. Royce & Associates has contractually agreed to waive fees and/or reimburse operating expenses to the extent necessary to maintain the Fund’s net annual operating expenses, other than dividends on securities sold short and interest expense on borrowing, at or below 1.24% through April 30, 2015 and at or below 1.99% through April 30, 2023. Operating expenses for Royce Opportunity Fund reflect total annual operating expenses for the Investment Class as of the Fund’s most current prospectus and include management fees, other expenses, and acquired fun fees and expenses. Acquired fund fees and expenses reflect the estimated amount of the fees and expenses incurred indirectly by the Fund through its investments in mutual funds, hedge funds, private equity funds, and other investment companies.

Important Disclosure Information

The thoughts and opinions expressed 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. Royce Opportunity Select Fund and Royce Opportunity Fund invest primarily in small-cap and micro-cap companies, which may involve considerably more risk than investing in larger-cap stocks. (Please see “Primary Risks for Fund Investors” in the prospectus.) Royce Opportunity Select Fund 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 o these stocks would cause the Fund’s overall value to decline to a greater degree. (Please see “Primary Risks for Fund Investors” in theprospectus.) The Fund may sell securities short which involves selling a security it does not own in anticipation that the security’s price will decline. Short sales present unlimited risk on an individual stock basis since the Fund may be required to buy the security sold short at a time when the security has appreciated in value. 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.) Royce Opportunity Fund’s broadly diversified portfolio does not ensure a profit or guarantee against loss. Russell Investment Group is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Russell® is a trademark of Russell Investment Group. The Russell 2000 is an unmanaged, capitalization-weighted index of domestic small-cap stocks. It measures the performance of the 2,000 smallest publicly traded U.S. companies in the Russell 3000 index. The performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index.


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