How did Royce Opportunity's Strategy perform in 4Q20?
Bill Hench We were very pleased that the Fund enjoyed a strong quarter, advancing 38.9% and beating both its primary benchmarks, the Russell 2000 Value (+33.4%), and the Russell 2000 (+31.4%) Indexes. The performance edge in 2020's final quarter helped the portfolio maintain impressive relative advantages. The Fund beat both indexes for the calendar year, gaining 26.5% versus 4.6% for the small-cap value index and 20.0% for the Russell 2000. In addition, Opportunity outperformed the Russell 2000 Value for the three-, five-, 10-, 15-, 20-year, and since inception (11/19/96) periods ended 12/31/20 while it also beat the Russell 2000 for all of these spans except the three- and 10-year periods.
Which areas of the portfolio made the biggest impacts on performance?
Rob Kosowsky Each of the Fund's 11 equity sectors finished the quarter in the black, and we got the biggest positive contributions from Information Technology and Industrials—which are our two largest sectors. The smallest positive impacts came from the two smallest, Utilities and Communication Services.
Suzanne Franks We saw a similar pattern at the industry level, where semiconductors & semiconductor equipment, the Fund's largest industry weighting, made by far the biggest contribution, followed by machinery, which is part of Industrials.
Which industries had a negative impact on 4Q20 performance?
RK Only two industries detracted from 4Q20's performance, IT services, from Information Technology, and the air freight & logistics group in Industrials. That gives you an idea of not only how strong the quarter was, but also how widespread the gains were.
Can you discuss a portfolio holding that did well in 4Q20?
BH Our top contributor at the position level was Magnite (MGNI, Financial)—the world's largest independent sell-side advertising platform. Magnite provides technology for businesses to monetize their content across all screens and formats, including desktop, mobile, and audio. The market was wildly enthusiastic about the company's success in the growth of OTT, or 'over the top' media, which bypasses the cable, broadcast, and satellite TV platforms that traditionally control or distribute this kind of content.
What about a company that hurt fourth-quarter performance?
SF Limelight Networks (LLNW, Financial), a content delivery network provider, was the quarter's top detractor. Investors had high expectations for the company that were rooted in the same trend toward growth in OTT advertising. In Limelight's case, however, those expectations weren't met, and the stock sold off. We shared in this sense of disappointment and reduced our position.
What helped 4Q20 performance relative to the Russell 2000 Value Index?
BH The Fund's advantage came entirely from stock selection. Sector allocation detracted marginally. On a sector basis, we benefited most from our big overweight—as well as stock selection—in Information Technology. Savvy stock picks also gave the portfolio a pronounced edge in Industrials and Consumer Discretionary.
What factors hurt performance versus the benchmark?
RK The Fund's cash position, its much lower exposure to rebounding Financial stocks, and its underweight in Energy all detracted from performance versus the Russell 2000 Value in 4Q20.
Turning to the calendar year, what sectors and industries drove the Fund's terrific 2020 performance?
RK We got positive performances from eight of the portfolio's 11 equity sectors in 2020. Three made especially outsized gains—Information Technology, Consumer Discretionary, and Health Care. As was the case in 4Q20, semiconductors & semiconductor equipment led the industry groups by a wide margin. Health care providers & services followed in second place.
Which areas detracted in 2020?
SF Three sectors detracted. The biggest negative impact came from Energy, where the oil, gas & consumable fuels group hurt us most. Financials came next—our holdings in banks fared poorly in the sector. Finally, our holdings in Utilities also detracted from performance. Each of these has a low weighting in the portfolio, especially the last.
Which portfolio position did best in 2020?
SF Owens & Minor (OMI, Financial) was our top contributor for 2020. The company distributes medical and surgical supplies throughout the U.S. It also provides supply chain management, logistics, technology services, and testing and monitoring supplies for diabetics. The company saw high demand, particularly for PPE products, and executed effectively. Each helped Owens & Minor to post significant gains in adjusted net income and revenues in 2020.
Which stock detracted most?
BH Hertz Global Holdings (HTZGQ, Financial), the car and truck rental specialist, was the biggest detractor at the position level for the year. We initially liked it as a turnaround candidate. But any progress was significantly impeded by the coronavirus outbreak, which exposed the risks of its cash-poor balance sheet and its heavy reliance on business at airports. We began to exit our position in the spring, before the firm filed for Chapter 11.
How did the portfolio perform versus the Russell 2000 Value for the calendar year?
RK We benefited from both sector allocation decisions and stock selection, with the former making the larger positive impact versus the Russell 2000 Value. Both our overweight and effective stock picking gave us a sizable relative advantage in Information Technology, while our lower exposure and, to a lesser degree, stock selection in Financials.
SF Our larger weighting in Health Care also helped, along with some savvy stock picks. On the other hand, the portfolio's exposure to Energy, our lower weighting in Consumer Staples, and our cash holdings all hurt relative results in 2020.
How have you been positioning the portfolio for 2021?
BH We've heard a lot of commentary recently that liquidity is solely or mostly driving higher prices for stocks, commodities, and a host of other assets. Yet when we look closely at companies and analyze the overall environment, we also see favorable factors such as tight inventories, huge pent-up demand in certain end markets, and the possible continuation of better employment numbers. We think the combination of these factors paints a brighter picture for small-cap prospects. At the same time, we also see some significantly less attractive issues, including the contentious political situation, the possibility of indiscriminate money printing, and trade concerns. As always, we're looking for stocks that will improve over the life of our investment from the not-so-rosy condition in which we first find them to a better state (and a higher price), typically via earnings improvement or recovery. A backdrop that includes better GDP growth, low rates, and ample liquidity should prove helpful in this task. On balance, we're optimistic about the next few years.
Mr. Hench, Ms. Franks, and Mr. Kosowsky's thoughts and opinions concerning the stock market are solely their own and, of course, there can be no assurance with regard to future market movements. No assurance can be given that the past performance trends as outlined above will continue in the future.
The performance data and trends outlined in this presentation are presented for illustrative purposes only. Past performance is no guarantee of future results. Historical market trends are not necessarily indicative of future market movements.
