Chuck Royce has been the President and Co-Chief Investment Officer of Royce & Associates, LLC and President of The Royce Funds since 1972 he founded the firm. He claims 47 years of investment experience, with 37 years as a smaller-company value portfolio manager.
Unusual Approach to Investing
He certain chooses to operate in an unusual space. First, he chooses and stays with small-cap stocks; secondly, probably because of the first and $28 billion asset under management, his firm now owns over 1500 stocks; and thirdly, rather than have a few mutual funds, his firm manages tens of funds, including open-end funds, close-end funds, and some funds only available for the qualified clients.
We are sure Chuck Royce has good reasons to set up all the funds, but GuruFocus has not figured that out yet.
Perfomance
As a representative, we choose one of his funds to show (off) his performance:
Not bad, right?
Chuck Royce shows that you can beat the market with small cap stocks, and a diversified portfolio.
There is value everywhere.
At the end of 1Q10, Chuck Royce released his quarterly comment on market.
Royce has a balanced view towards the future. If the market return to normalcy with a decade of average annual 10-year returns in the 6% - 9% range, it will truly be a blessing to equity investors who assume the risk.
Royce has a balanced view towards the future. If the market return to normalcy with a decade of average annual 10-year returns in the 6% - 9% range, it will truly be a blessing to equity investors who assume the risk.
The $28 billion stock equity and 1500+ stocks are allocated in the following sectors. Industrials, Financials, Consumer Goods take the top three spot in percentage of assets.
Top Holdings
Because of the large number of stocks in the portfolio, even the largest holding is only taking about 1% of total asset. On the other hand, because of the small cap nature of the stocks, 1% of $28 billion carries a heavy weight.
These are the top holdings:
No. 1: Unit Corp. (UNT, Financial), Weightings: 1.07% - 7,138,779 Shares
UNIT CORP. is engaged in the land contract drilling of oil and natural gas wells, the development, acquisition and production of oil and natural gasproperties, and the marketing of natural gas. Unit Corp. has a market cap of $2.02 billion; its shares were traded at around $42.35 with a P/E ratio of 15.7 and P/S ratio of 2.8. Unit Corp. had an annual average earning growth of 4.2% over the past 10 years.
Royce has been a long term holder of the stocks (since 2002). In the most recent quarter, he bought about 10,000 shares. 10% Owner Kaiser Family Foundatio George has also been buying stocks recently too: 34,200 shares on 03/30/2010, and 31,900 shares on 03/26/2010.
No. 2: Reliance Steel & Aluminum Co. (RS, Financial), Weightings: 0.94% - 5,425,553 Shares
Reliance Steel & Aluminum Co. is one of the largest metals service center companies in the United States. Reliance Steel & Aluminum Co. has a market cap of $3.51 billion; its shares were traded at around $47.49 with a P/E ratio of 20.3 and P/S ratio of 0.7. The dividend yield of Reliance Steel & Aluminum Co. stocks is 0.8%. Reliance Steel & Aluminum Co. had an annual average earning growth of 21.8% over the past 10 years. GuruFocus rated Reliance Steel & Aluminum Co. the business predictability rank of 3.5-star.
Royce has held this stock since 2004 and in the recent quarter he bought about 100,000 shares.
No. 3: Knight Capital Group Inc. (NITE, Financial), Weightings: 0.94% - 17,432,385 Shares
Knight Capital Group is focused on meeting the needs of institutional and broker-dealer clients by providing comprehensive trade execution services in equities. Knight Capital Group Inc. has a market cap of $1.41 billion; its shares were traded at around $14.94 with a P/E ratio of 11.3 and P/S ratio of 1.2. Knight Capital Group Inc. had an annual average earning growth of 4.7% over the past 10 years.
Royce bought about 500,000 shares in the recent quarter. He held this stock since 2005.
No. 4: Federated Investors Inc. (FII, Financial), Weightings: 0.91% - 9,806,782 Shares
Federated Investors, Inc. is a provider of investment management and related financial services. Federated Investors Inc. has a market cap of $2.42 billion; its shares were traded at around $23.5 with a P/E ratio of 11.9 and P/S ratio of 2.1. The dividend yield of Federated Investors Inc. stocks is 4.1%. Federated Investors Inc. had an annual average earning growth of 3% over the past 10 years.
Royce bought about 800,000 shares in the recent quarter. He has held this stock since 2001.
No. 5: Lincoln Electric Holdings Inc. (LECO, Financial), Weightings: 0.89% - 4,642,670 Shares
Lincoln Electric Holdings, Inc. is a full-line manufacturer of welding and cutting products and integral horsepower industrial electric motors. Lincoln Electric Holdings Inc. has a market cap of $2.47 billion; its shares were traded at around $58.06 with a P/E ratio of 26.4 and P/S ratio of 1.4. The dividend yield of Lincoln Electric Holdings Inc. stocks is 1.9%.
Royce sold about 200,000 shares in the recent quarter. The firm has held the stock since 2001.
No. 6: The Buckle Inc. (BKE, Financial), Weightings: 0.86% - 6,620,831 Shares
Buckle, Inc. is a retailer of medium to better-priced casual apparel for young men and women. The Buckle Inc. has a market cap of $1.66 billion; its shares were traded at around $35.55 with a P/E ratio of 13 and P/S ratio of 1.9. The dividend yield of The Buckle Inc. stocks is 2.2%. The Buckle Inc. had an annual average earning growth of 18.2% over the past 10 years.
Royce sold about 900,000 shares in the most recent quarter and he has held the stock since 2001.
Conclusion
Chuck Royce seeks value among the small cap stocks.
GuruFocus provides real time information and insights of Investment Gurus such as Warren Buffett and Chuck Royce for Premium Members. If you are not a premium member, click here to sign up or upgrade. 7-Day Free Trial is available
Unusual Approach to Investing
He certain chooses to operate in an unusual space. First, he chooses and stays with small-cap stocks; secondly, probably because of the first and $28 billion asset under management, his firm now owns over 1500 stocks; and thirdly, rather than have a few mutual funds, his firm manages tens of funds, including open-end funds, close-end funds, and some funds only available for the qualified clients.
We are sure Chuck Royce has good reasons to set up all the funds, but GuruFocus has not figured that out yet.
Perfomance
As a representative, we choose one of his funds to show (off) his performance:
Performance of Premier Fund (RYPRX)
| Year | Return (%) | S&P500 (%) | Excess Gain (%) |
|---|---|---|---|
| 2009 | 33.3 | 26.5 | 6.8 |
| 2008 | -28.3 | -37 | 8.7 |
| 2007 | 11.6 | 5.61 | 6.0 |
| 2006 | 7.7 | 15.79 | -8.1 |
| 2005 | 15.9 | 4.91 | 11.0 |
| 2004 | 21.3 | 12 | 9.3 |
| 2003 | 38.8 | 28.7 | 10.1 |
| 2002 | -7.8 | -22.1 | 14.3 |
| 2001 | 9.6 | -11.9 | 21.5 |
| 2000 | 17.1 | -9.1 | 26.2 |
Not bad, right?
Chuck Royce shows that you can beat the market with small cap stocks, and a diversified portfolio.
There is value everywhere.
At the end of 1Q10, Chuck Royce released his quarterly comment on market.
Were you surprised by the market's decline in late January and subsequent strong rebound in February and March?
Neither event was terribly surprising to me. During the current rally, we've now seen three declines in the range of 9% - 10%, so January's downturn was entirely consistent with what the rally has shown so far, as was the rebound through the rest of the first quarter. The market seems to me to be demonstrating a reasonable amount of volatility, with the sort of ebb and flow that one would expect during a more historically typical performance period, which is a good thing in my view after the tumult of 2008 and early 2009. A return to what feels like a normal market continues to strike me as a highly positive development.
When do you anticipate that quality stocks might emerge as market leaders?
"Lower returns tend to make investors more conscious of risk and more discriminating about fundamentals."
It's hard to pinpoint. I don't expect it to happen suddenly or dramatically. Quality stocks as we define them—those with strong balance sheets, high returns on invested capital, ample free cash flow and, as an added plus, dividends— are likely to emerge as leaders by fits and starts. Certainly as a firm we're very pleased with the absolute returns of our own Funds that have what we regard as a strong quality bias both during the first quarter and through the rally as a whole. Most of them still trail our more opportunistic portfolios, but I expect that the pace of the rally will continue to slacken, as it has over the past six months, which would set the stage for quality companies to move to the front of the pack. Lower returns tend to make investors more conscious of risk and more discriminating about fundamentals.
What do you think investors' expectations of returns going forward should be?
My take on this hasn't changed over the last six months. I think that we're entering a period of low, positive returns on an annualized basis, and I would not be at all surprised to see the decade end with average annual 10-year returns in the 6% - 9% range. Of course, the history of markets and economies always teaches us to expect the unexpected, but my hunch is that this decade will be as quietly positive as the previous one was wildly disappointing. So I would caution any investor who thinks that the heady returns we've all enjoyed in the current bull period are going to be the "New Normal." My guess is that we're in for a long phase of solid but unspectacular returns for equities
What are some of the challenges of managing small-cap value-oriented portfolios in a more stable, bullish environment?
Our investment practice as a firm is very much back to what I see as normal, too. The worst days of the bear market created the largest number of attractive buying opportunities that I'd seen since the decline of the "Nifty Fifty" market in the '70s. You could cast your net over the entire small-cap market and haul in any number of promising candidates. However, that was an exceptional, hopefully anomalous, period. So while we're grateful that we had that chance, we're more comfortable in a time like the present. Every day, we're looking closely at a number of companies, both domestic and international, that for one reason or another have not participa
ted fully or at all in the rally. We're spending a lot of time looking at earnings two or three years down the road and using that as an additional, important component in valuing businesses. That's been a very common practice for decades, but we weren't doing a lot of that at the end of 2008 because we were more focused on whether or not a company had what it took to survive. In a more stable market, that issue is far less of a concern, which leads us to focus more on the fundamentals as they exist in a steadier economic environment.
Why do you think that small-cap stocks continue to outperform their large-cap counterparts?
I think a lot of it has to do with perception. Through the end of the first quarter, the rally remained most generous toward more risky, lower-quality stocks, which for a sizable number of investors equates to small-cap. That's obviously not our view—we think quality exists throughout the equity universe, but that perception remains strong. I still anticipate frequent leadership rotation between small-cap and large-cap in the coming months. In fact, there's recently been a lot of commentary about the untapped value in large-cap, especially mega-cap, stocks, so a catch-up period for that asset class is inevitable and may actually be the sign that quality stocks have begun to lead.
Royce has a balanced view towards the future. If the market return to normalcy with a decade of average annual 10-year returns in the 6% - 9% range, it will truly be a blessing to equity investors who assume the risk.
Royce has a balanced view towards the future. If the market return to normalcy with a decade of average annual 10-year returns in the 6% - 9% range, it will truly be a blessing to equity investors who assume the risk.
The $28 billion stock equity and 1500+ stocks are allocated in the following sectors. Industrials, Financials, Consumer Goods take the top three spot in percentage of assets.
| Industry | 2009-12-31 | 2010-03-31 |
|---|---|---|
| Technology | 10.3% | 10% |
| Financials | 15.3% | 15.2% |
| Utilities | 0.8% | 0.7% |
| Telecommunications | 0.3% | 0.2% |
| Consumer Services | 9.8% | 10.3% |
| Health Care | 5.8% | 5.8% |
| Consumer Goods | 11.3% | 11.6% |
| Industrials | 28.8% | 28.7% |
| Basic Materials | 10.6% | 10.3% |
| Oil & Gas | 5.4% | 5.4% |
Top Holdings
Because of the large number of stocks in the portfolio, even the largest holding is only taking about 1% of total asset. On the other hand, because of the small cap nature of the stocks, 1% of $28 billion carries a heavy weight.
These are the top holdings:
No. 1: Unit Corp. (UNT, Financial), Weightings: 1.07% - 7,138,779 Shares
UNIT CORP. is engaged in the land contract drilling of oil and natural gas wells, the development, acquisition and production of oil and natural gasproperties, and the marketing of natural gas. Unit Corp. has a market cap of $2.02 billion; its shares were traded at around $42.35 with a P/E ratio of 15.7 and P/S ratio of 2.8. Unit Corp. had an annual average earning growth of 4.2% over the past 10 years.
Royce has been a long term holder of the stocks (since 2002). In the most recent quarter, he bought about 10,000 shares. 10% Owner Kaiser Family Foundatio George has also been buying stocks recently too: 34,200 shares on 03/30/2010, and 31,900 shares on 03/26/2010.
No. 2: Reliance Steel & Aluminum Co. (RS, Financial), Weightings: 0.94% - 5,425,553 Shares
Reliance Steel & Aluminum Co. is one of the largest metals service center companies in the United States. Reliance Steel & Aluminum Co. has a market cap of $3.51 billion; its shares were traded at around $47.49 with a P/E ratio of 20.3 and P/S ratio of 0.7. The dividend yield of Reliance Steel & Aluminum Co. stocks is 0.8%. Reliance Steel & Aluminum Co. had an annual average earning growth of 21.8% over the past 10 years. GuruFocus rated Reliance Steel & Aluminum Co. the business predictability rank of 3.5-star.
Royce has held this stock since 2004 and in the recent quarter he bought about 100,000 shares.
No. 3: Knight Capital Group Inc. (NITE, Financial), Weightings: 0.94% - 17,432,385 Shares
Knight Capital Group is focused on meeting the needs of institutional and broker-dealer clients by providing comprehensive trade execution services in equities. Knight Capital Group Inc. has a market cap of $1.41 billion; its shares were traded at around $14.94 with a P/E ratio of 11.3 and P/S ratio of 1.2. Knight Capital Group Inc. had an annual average earning growth of 4.7% over the past 10 years.
Royce bought about 500,000 shares in the recent quarter. He held this stock since 2005.
No. 4: Federated Investors Inc. (FII, Financial), Weightings: 0.91% - 9,806,782 Shares
Federated Investors, Inc. is a provider of investment management and related financial services. Federated Investors Inc. has a market cap of $2.42 billion; its shares were traded at around $23.5 with a P/E ratio of 11.9 and P/S ratio of 2.1. The dividend yield of Federated Investors Inc. stocks is 4.1%. Federated Investors Inc. had an annual average earning growth of 3% over the past 10 years.
Royce bought about 800,000 shares in the recent quarter. He has held this stock since 2001.
No. 5: Lincoln Electric Holdings Inc. (LECO, Financial), Weightings: 0.89% - 4,642,670 Shares
Lincoln Electric Holdings, Inc. is a full-line manufacturer of welding and cutting products and integral horsepower industrial electric motors. Lincoln Electric Holdings Inc. has a market cap of $2.47 billion; its shares were traded at around $58.06 with a P/E ratio of 26.4 and P/S ratio of 1.4. The dividend yield of Lincoln Electric Holdings Inc. stocks is 1.9%.
Royce sold about 200,000 shares in the recent quarter. The firm has held the stock since 2001.
No. 6: The Buckle Inc. (BKE, Financial), Weightings: 0.86% - 6,620,831 Shares
Buckle, Inc. is a retailer of medium to better-priced casual apparel for young men and women. The Buckle Inc. has a market cap of $1.66 billion; its shares were traded at around $35.55 with a P/E ratio of 13 and P/S ratio of 1.9. The dividend yield of The Buckle Inc. stocks is 2.2%. The Buckle Inc. had an annual average earning growth of 18.2% over the past 10 years.
Royce sold about 900,000 shares in the most recent quarter and he has held the stock since 2001.
Conclusion
Chuck Royce seeks value among the small cap stocks.
GuruFocus provides real time information and insights of Investment Gurus such as Warren Buffett and Chuck Royce for Premium Members. If you are not a premium member, click here to sign up or upgrade. 7-Day Free Trial is available
