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Committed to Small Caps - Royce’s Top Yields in Review

December 10, 2013 | About:
Sally Jones

Sally Jones

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He wears a bow tie and is considered a pioneer of small cap investing. Guru Chuck Royce is the founder, president, co-chief investment officer of Royce & Associates, and the portfolio manager of the Royce Total Return Fund. Chuck Royce has been the lead manager since 1993 and Jay Kaplan has been a portfolio manager and principal since 2011. Whitney George is the firm’s co-chief investment manager, portfolio manager and managing director.

Royce’s investment objective is long-term growth of capital and current income. A self-described contrarian, Royce holds a broadly diversified portfolio and uses a disciplined value approach. He invests in small-cap and micro-cap stocks that pay dividends. Royce uses a bottom-up business buyer’s orientation rather than a Wall Street investor’s approach. The Royce Funds are comprised of numerous featured funds, open-ended funds, closed-ended funds and annuity portfolios. The firm has around $38 billion in total assets under management as of Sept. 30, 2013.

When selecting a company, Royce looks for the magic three: a strong balance sheet, a track record of business success and future potential for profit. He has said that small-cap and microcap companies can be very fragile. The company looks for growing businesses that produce free cash flow and can withstand market and economic difficulties.

Using a small-cap strategy at Royce & Associate funds, Chuck Royce currently manages 1,447 stocks in total, valued at $33.6 billion. His portfolio has a quarter-over-quarter turnover rate of 5%. His portfolio update as of this week shows 86 new stocks. The stocks bought by Guru Chuck Royce have averaged a return of 21.17% over 12 months. Royce Total Return Fund returned 14.4% in 2012, and 23.5% in 2010. In 2011, the fund had a loss of 1.7%. As of Sept. 30, 2013, The Royce & Associates portfolio is weighted with top sectors: industrials at 26.8%, technology at 19.1% and consumer cyclical at 18.1%.

Royce and Kaplan delivered their June 30, 2013 commentary, saying: “Investors’ ongoing hunger for yield did not lead quite enough of them to dividend-paying small-caps during the first half of 2013. Royce Total Return Fund, which invests primarily in dividend-paying small- and micro-cap companies, rose a more-than-respectable 12.8% for the year-to-date period ended June 30, 2013, trailing the 15.9% advance of its benchmark, the Russell 2000 Index, for the same period…Total Return outpaced the Russell 2000 for the 15-year and since inception (12/15/93) periods ended June 30, 2013. The Fund’s average annual total return since inception was 11.1%.”

Royce & Associates is celebrating its 20th anniversary of the Royce Total Return Fund. In his recent commentary, Royce said, “We have always seen dividends and small-caps as two great things that work well together, kind of like chocolate and peanut butter. In fact, our experience with dividend-paying small-caps stretches back to the 1970s, when we regularly purchased them in Royce Pennsylvania Mutual Fund’s portfolio.”

Read Royce’s full commentary.

Here’s a review of the highest-yield stocks held by Chuck Royce, as of Sept. 30, 2013:



United Online Inc. (UNTD)

Weightings: 0.015%

Current Shares: 633,627

Value: $5,056,000

Up 86% over 12 months, United Online Inc. has a market cap of $181.7 million; its shares were traded at around $13.68 with a P/B ratio of 0.40. The dividend yield is 16.07%.

Commencing operations in 2001 following the merger of Internet access providers NetZero Inc. and Juno Online Services Inc., United Online Inc. is a provider of consumer products and services over the Internet under a number of brands, including FTD, Interflora, Flying Flowers, Flowers Direct, Drake Algar, Classmates, schoolFeed, StayFriends, Trombi, MyPoints, NetZero, and Juno.

GuruFocus currently ranks UNTD one star out of five stars for business predictability.



Guru Action: As of Sept. 30, 2013, Chuck Royce increased his position by 87.43%, buying 42,224 shares at an average price of $10.56 per share, gaining 29.5%.

Over a five-year history, Royce has averaged a gain of 6% buying 373,427 shares at an average price of $12.92 per share. Selling, he gained 76% on 794,189 shares at an average price of $7.76 per share.



Penn Virginia Corporation (PVA)

Weightings: 0.04%

Current Shares: 2,044,960

Value: $13,599,000

Up 123% over 12 months, Penn Virginia Corporation has a market cap of $652.9 million; its shares were traded at around $10.00 with a P/B ratio of 0.80. The dividend yield is 15.40%.

Formed in 1882, Penn Virginia Corporation is an independent oil and gas company engaged in the development, exploration and production of natural gas and oil in domestic onshore regions of the U.S. including Texas, Appalachia, the Mid-Continent and Mississippi.

GuruFocus currently ranks PVA one star out of five stars for business predictability.

Guru Action: As of Sept. 30, 2013, Chuck Royce increased his position by 6.51%, buying 125,000 shares at an average price of $5.20 per share, for a gain of 92.3%.

Over five years, Chuck Royce has averaged a gain of 14% buying 1,862,700 shares at an average price of $8.74 per share. Selling, he took a loss of 15% on 499,280 shares at an average price of $11.77 per share.



Tower Group International Ltd. (TWGP)

Weightings: 0.0029%

Current Shares: 141,042

Value: $987,000

Down 78% over 12 months, Tower Group International Ltd. is a property and casualty insurance company. The company has a market cap of $224.1 million; its shares were traded at around $3.90 with a P/B ratio of 0.40. The dividend yield is 18.50%.

GuruFocus currently ranks TWGP one star out of five stars for business predictability.



Guru Action: As of Sept. 30, 2013, Chuck Royce reduced his position by 78%, selling 500,000 shares at an average price of $16.75, taking a loss of 76.7%.

Over five-years of losses, Chuck Royce has averaged a loss of 83% buying 860,633 shares at an average price of $22.34 per share. Selling, he lost 77% on 719,591 shares at an average price of $17.29 per share.

Here’s Chuck Royce’s complete portfolio.



Also take a look at Chuck Royce’s latest trades at Stock Picks.

View his undervalued stocks, high-yield companies and top growth stocks.

Use the GuruFocus Value Screen to find 52-Week Lows and discover potentially deep value stocks held by billionaire Guru investors.

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About the author:

Sally Jones
Sally Jones writes about Real Time Picks. She says, "I truly enjoy watching the Gurus in realtime and telling their story."

Rating: 3.0/5 (2 votes)

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