Fund performance
Royce Low-Priced Stock Fund was down 10.4% in 2015, trailing its small-cap benchmark, the Russell 2000 Index, which lost 4.4% for the same period. For the year-to-date period ended June 30, 2015, Low-Priced Stock advanced 2.6% compared to 4.8% for the small-cap index. A broadly bearish wave hit in the third quarter when the fund fell 15.7% while the Russell 2000 was down 11.9%.
Net losses for Financials (due to an underweight in banks and REITs) and Information Technology hurt relative results most during the downturn. Equities rebounded in the year’s closing quarter, and the portfolio participated, increasing 3.5% (versus 3.6% for the benchmark), keyed by renewed strength in the Information Technology sector. The fund outpaced the Russell 2000 for the 20-year and since inception (Dec. 15, 1993) periods ended Dec. 31, 2015. Low-Priced Stock’s average annual total return since inception was 9.8%.
2015 was a more difficult year for small-caps than the benchmark’s return might show—on an equal-weighted basis, the Russell 2000 was down 10.1%. However, we believe these difficulties (as well those that arrived with the new year in 2016) presented promising long-term opportunities. Indeed, following a strong fourth quarter, we entered the new year with renewed, though cautious, optimism.
What worked and what didn't
Seven of the portfolio’s nine equity sectors finished the year with net losses. Energy led by a wide margin, and the sector’s energy equipment and services group detracted most on an industry basis. The generally slower pace of global industrial activity has sapped demand while producers remain committed to keeping the pumps open. Our efforts to high-grade our holdings in the sector led us to increase stakes in those companies in which we had high levels of conviction, such as Gulf Island Fabrication (GIFI, Financial), Profire Energy (PFIE, Financial) and Unit Corporation (UNT, Financial). Conversely, we sold our shares of C&J Energy Services (CJES, Financial), Calfrac Well Services (CFW, Financial) and Trican Well Services (TCW, Financial).
On a position basis, Acacia Research (ACTG, Financial), a leading patent assertion company known as a nonpracticing entity, posted the biggest net losses. While the company has amassed a formidable portfolio of patents and is in the early stages of asserting against infringing parties, it has not been as successful in monetizing these assets as we had hoped. As a risk control measure, we reduced our position through much of the year. Dundee Corporation is a diversified financial services company that also holds a portfolio of investments primarily in energy, natural resources and agriculture. Its stock was hurt by declining commodity prices, and we sold some shares in the second half of the year.
Silicon Graphics International (SGI, Financial) provides computing and storage technology for big data applications. Its stock price fell early in 2015 over privacy-driven concerns that slowed sales to the NSA. After selling shares, we began to rebuild a position late in the year when we started to see increased visibility in its backlog of new products targeting more commercial applications.
Zinc producer Horsehead Mining was the loss leader in metals and mining, the portfolio’s second-largest detractor by industry. Among other challenges, management struggled to boost production in a new processing facility to a level that would generate sustainable returns for shareholders. The combination of falling zinc prices, low utilization and relatively high levels of project financing led us to sell our position.
On the positive side, firearms manufacturer Smith & Wesson Holding (SWHC, Financial) continued to gain market share while recent heavy investments in R&D led to major product innovation. Value Partners (Trades, Portfolio) Group is one of the world’s largest asset managers focused on Hong Kong and China. We trimmed our position during the second quarter, though we held some shares given the long-term opportunities we see in Asia.
On a relative basis, the biggest issues were ineffective stock selection in Information Technology (most notably in Internet software and services and technology hardware storage and peripherals), our underweight in Health Care, an overweight in Energy and poor stock selection in Materials. Conversely, stock selection provided relative advantages in Industrials and Consumer Discretionary.
Top contributors to performance for 2015 (%)
- Smith & Wesson Holding Corporation 0.67%
- Value Partners (Trades, Portfolio) Group 0.64%
- Tecumseh Products (TECU, Financial) 0.48%
- Zealand Pharma (ZEAL, Financial) 0.43%
- Orbotech (ORBK) 0.39%
Top detractors from performance for 2015 (%)
- Acacia Research -0.91%
- Dundee Corporation Cl. A (DC.PR.A) -0.72%
- Silicon Graphics International -0.66%
- Horsehead Holding Corporation -0.58%
- Global Power Equipment Group (GLPW) -0.52%
Current positioning and outlook
At the end of 2015, the portfolio remained overweight in Information Technology and Industrial stocks, which look well positioned to benefit from the relative strength of the U.S. economy. We believe a number of opportunities exist in secular trends such as The Internet of Things and mobile computing that have positive implications for niche small-cap tech companies. While oil prices remain depressed, we expect our more conservatively capitalized holdings to begin benefiting from their balance sheet strength as credit conditions continue to worsen for the industry. We added to companies in Consumer Discretionary as we see U.S. consumers as reasonably well positioned given solid employment trends and lower energy prices. We have also been adding to positions in Financials because we view the Fed’s first steps toward a more normalized interest rate environment as generally constructive for many companies in the sector. Health Care remains our largest underweight biotech specifically, where multiples continued to look too stretched for our valuation-based discipline.
