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Q and A with Gurus: Chuck Royce Takes Your Questions

May 03, 2011

GuruFocus is excited to announce that renowned small-cap investing guru Chuck Royce will join our readers for a Q&A session. Mr. Royce is the President and Co-Chief Investment Officer of New York-based Royce & Associates, a tremendously successful small-cap investing firm which has $37 billion in assets under management.

With 48 years of experience, he has one of the longest tenures of any active mutual fund manager. Royce’s Premier Fund has had stellar performance – in 2010 it returned 26.5 percent versus the S&P 500’s 15.1%, and in 2009 it returned 33.3% versus the S&P 500’s 26.5%. In the last 11 years, it has had only 2 years with negative returns. From 2006-2010, his five-year cumulative return was 45.3%, compared to the S&P 500’s 12.2%, and his 10-year cumulative return was 186.5%, compared to the S&P’s 16.4%.

Royce’s firm specializes in high-quality small companies with market capitalizations that rarely exceed $5 billion, although some of his funds contain stock of companies with market capitalizations of up to $10 billion. In this year’s economic climate, he is seeing strong returns in these stocks. He believes the opportunity in the next 10-20 years in the international smaller cap world is just as solid as it was 20 years ago. He is currently sticking with quality buys, and has a long-term interest in industrial companies, factories – which he believes are benefited by lower dollar and global activity – and global enterprises both in the United States and in developed foreign countries.

In the long term, Mr. Royce is optimistic about the prospects for equities. He expects them to have annual returns in the high single or low double digits, especially for the decade cumulatively. He believes small-cap stocks will fully participate, although he believes it will be a cyclical market with frequent rotations in leadership.

Royce is a value investor who looks for what he believes to be terrific stocks that trade for less than the companies’ estimated worth (or their enterprise value), and preferably 30% to 50% less.

To select portfolio holdings, he uses a bottom-up approach focusing on the following characteristics:

  • High internal rates of return
  • Strong balance sheet
  • Ability to generate free cash flow

Part of the firm’s search for eligible companies may involve interviewing senior management and interviewing customers, suppliers and competitors.

Royce portfolios are usually highly diversified, with no one stock taking up more than 2% of his holdings. GuruFocus offers a full list of his holdings here.

To ask your questions to Chuck Royce, simply enter them in the comment box below. We will send them to him and publish his responses.

About the author:

Charlie Tian, Ph.D. - Founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

Rating: 3.0/5 (38 votes)


Valueradar - 6 years ago    Report SPAM
thank you very much for the opportunity, Mr. Royce!

Here are some of my questions:

1. GMO's Jeremy Grantham thinks that small cap stocks are more over valued than large cap stocks, and small cap stocks are going to return less than the large cap peers for the next 7-10 years, what is your view on this?

2. Do you really think that small investors have an edge with small cap stocks?

Adib Motiwala
Adib Motiwala - 6 years ago    Report SPAM
Mr Royce,

For investors who do not have the luxury of having 5 management teams coming to their offices daily, what would you recommend in terms of research. I am assuming the investor has studied the financial statements and read the annual/quarterly reports.

Walter Schloss was a successful investor. He too was quite diversified and invested in upto 100 companies. However, he purely relied on the numbers to find bargains. Since you go beyond the numbers into the qualitative and management side, why dont you concentrate more to say 25-30 names ? Is it because you need more diversification in the small to smidcap space?

Buhrlakc - 6 years ago    Report SPAM
Chuck, thanks for taking our questions.

Can you discuss your qualitative approach to analyzing a business and the industry it participates in?

Gurufocus premium member - 6 years ago
1. Your firm own more than 1400 stocks. What is your investment process is like to analyze more than 1400 stocks? What kind of stocks will pass your screen process?

2. How do you define high quality for small cap companies?

3. How much does macro economic view play in your investment process?

4. Why do you investment heavily in industrials?

5. What kind of companies will work better for investors in an inflationary environment?

6. What is your view on Dollar decline? How do you protect your investment from dollar decline?

7. What is your view on gold and silver?

Thank you very much for the opportunity!

Sowassup premium member - 6 years ago
What industry segments do you believe are expected offer investors robust growth during the next 5 years from now and why?

If you had to pick top 5 stocks of companies that do less than 100 million in revenue, which would you pick?
Cyrano - 6 years ago    Report SPAM

It is a pleasure to be able to ask you a question.

Do you personally ever invest in mid to large cap stocks?

What is the average length of time that you like to hold a stock?_

Do you use any technical indicators to decide when to sell?

Thanks in advance

Grol1971 premium member - 6 years ago
Thanks for answering questions from us.

As a value investor, who is bottom-up oriented looking for paying $0.50 for $1 of value, how do you weight the macro situation and perspective. What is your macro opinion for the next 10 years in terms of inflation and market valuation. What would you recommend as important concepts in a investment strategy for the next 5-10 years?
Holly LaFon
Holly LaFon premium member - 6 years ago
Hi Mr. Royce. I know you are a small-cap investor primarily, but I noticed that you bought Cisco stock in the fourth quarter of 2010. What made you go out of the norm and buy shares of this large-cap company?
Idealize - 6 years ago    Report SPAM

Dear Mr. Royce what is your view on the junior precious metals miners space?

They seem to be in a permanent short stranglehold despite the rise in metals prices.

What do you see as a possible catalyst to these particular small cap stocks breaking out?
Taekkwon - 6 years ago    Report SPAM
How applicable is your style and focus on small-caps to the Technology, Media, and Telecommunications (TMT) sectors? How about the non-hardware TMT industries that tend to be dominated by network effects leaders? Are there any specific adjustments that you make for investing in TMT? Thank you very much.
Rhueglins premium member - 6 years ago
Chuck---- I know that you bought into Seabridge Gold about 18 months ago. It would appear as if that company hasn't participated in the big move in gold over that time frame. What is your current stance on the company, it's prospects andthe gold market.

AriePermadi premium member - 6 years ago
Hi Chuck,

Recently all chinese RTO stock has taking a beating as investor losing their confidence on those rto accounting credibility.

One stock I follow is SORL auto parts which you had on your portfolio. The valuation looks good considering stable growth and strong balance sheet.

How do you see this company management? is the CEO can be trusted? is there any red flag you see on this company.



Gurufocus premium member - 6 years ago
What did you do right during the market crash of 2008 so that your small cap fund lost far less than the benchmark? What lessons did you learn? What will you do differently?
Dfspmcil - 6 years ago    Report SPAM

what role macro has in ur investing. it looks macros would be bad in next a few years. what should we do. confusing scenario indeed.
Verng - 6 years ago    Report SPAM

Interesting questions but would be even more interesting... and informative... if i could find where Royce's answers to these questions are???

Anders - 6 years ago    Report SPAM
Mr Royce,

below statement caught my eye,

"Mr. Royce is optimistic about the prospects for equities. He expects them to have annual returns in the high single or low double digits, especially for the decade cumulatively."

Q: Assuming we are talking about return on equity, I am curious how you select companies that can bring superior return during high inflationary environment? i.e. preference of pricing power?

Best Regards,
Manolosalceda - 6 years ago    Report SPAM
Hello Mr. Royce,

Can you name all your holdings by name?, and do you know without looking to its financials what margins does these companies have and what's their return on invested capital?

I ask these questions because I don't see how can you follow so many holdings as you have and knowing how much money they make for you each year. How do you invest then?

Manuel A Salceda

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