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Sydnee Gatewood
Sydnee Gatewood
Articles (3568) 

Royce Investment Partners: Royce International Premier Fund Manager Commentary

By Mark Rayner

The Fund outperformed its benchmark for the year, as well as for the three-, five-, and matching 10-year/since inception (12/31/10) periods ended 12/31/20.

Fund Performance

Royce International Premier Fund advanced 15.7% for 2020, beating its benchmark, the MSCI ACWI ex-US Small Cap Index, which gained 14.2% for the same period. The Fund also outpaced the benchmark for the three-, five-, and matching 10-year/since inception (12/31/10) periods ended 12/31/20. We are happy to celebrate the Fund's 10-year anniversary during another year of strong absolute and relative performance.

What Worked… And What Didn't

Seven of the Fund's nine equity sectors made positive impacts on 2020's performance, with Information Technology and Industrials leading by wide margins. Energy and Communication Services were the only detractors, and each was a low weighting throughout the year.

The top contributor for 2020 was Japan's Daifuku (TSE:6383), which makes material handling equipment, such as automated storage systems, conveyors, and automatic sorters. It has six main segments whose aggregate revenues have made Daifuku the global number one in material handling. During 2020, investors seemed to selectively focus on certain end market exposures, most notably e-commerce in its intralogistics segment, one of the few areas to benefit from the global economic lockdown. More recently, its semiconductor warehousing segment attracted attention as semis saw renewed demand. Yet other areas of the business were weak in 2020, such as its airport segment. So while the company posted a 14% increase in operating profits on 10% higher revenues at mid-year, we did not think this was enough to justify the performance of its stock, which led us to trim our position.

Japan's TKC Corporation (TSE:9746) provides tax-related software and services to smaller companies and their tax accountants. The company's solutions convert customers' financial data into financial statements, accounting records, and tax return data to ensure that their returns are fully compliant and filed on time. TKC's solutions free its customers from tedious bookkeeping, allowing them to spend more time growing their business, and its clients are 50% more likely to be profitable than other companies. TKC delivered robust results for the fiscal year ended 9/30/20, with operating profits up 22% year-over-year. The company also benefited from digitalization, where intensifying requirements to file taxes electronically and the creation of 'smart municipalities' in Japan provide growing demand for its services. Yet we believe the market has not fully caught on to TKC's quality and long-term potential—it remains virtually uncovered by the sell-side, for example—as evidenced by its low valuation.

The top detracting position was the U.K.'s Hyve Group (LSE:HYVE), an event organizing company that we exited in March. Given our preference for what we think are quality companies with strong balance sheets, we typically choose to remain invested when temporary negative events unfold. However, we had begun to exit our position in Hyve during February 2020. With revenues set to fall dramatically, Hyve's negative working capital requirement—a key asset when the business is growing—would work against it. We also feared that its trade conference business would suffer longstanding negative effects from a business world less keen to travel and more used to developing virtual relationships.

TGS-NOPEC Geophysical (OSL:TGS) is the world's largest geoscience data company, producing, developing, and procuring primarily offshore seismic data that it sells to oil and gas companies. A well-managed, asset light business, TGS was nevertheless adversely affected by the dramatically reduced demand for energy in 2020. Yet the company will end its fiscal year with a substantial cash balance and continued to pay dividends in 2020, factors that drove us to add shares.

Looking at attribution for the calendar year, sector selection had the most significant impact on outperformance. In particular, the Fund's low relative exposure and strong stock selection in Real Estate, as well as in Financials (though to a lesser extent), had the largest positive impact on relative results. Conversely, Materials and Communication Services detracted from relative performance due to the Fund's lower relative exposures and stock performance.

Top Contributors to Performance20201 (%)

Daifuku 1.95
TKC Corporation 1.82
IMCD 1.64
As One 1.44
Benefit One 1.33

1 Includes dividends

Top Detractors from Performance20202 (%)

Hyve Group -1.31
TGS-NOPEC Geophysical -1.26
Loomis -1.13
OdontoPrev -0.95
Restore -0.94

2 Net of dividends

Current Positioning and Outlook

During 2020, most investors gravitated toward companies offering either 'thematic growth' or 'cyclical value' as the effects of the pandemic unfolded. Our modest outperformance against the benchmark was achieved even though our quality-oriented businesses typically do not fit this bill. We stuck to our core belief that long-run investment strategies should focus on companies with high and consistent returns on capital that enable investors to benefit from the long-term effects of compounding. We therefore sought to use pandemic-driven volatility to build existing positions and, equally important, to add new high-quality companies to the portfolio. We also believe that certain pandemic-driven changes will be structural, such as the increased digitalization of corporate work flows, and we will continue investing in companies poised to benefit from these changes. More important, we will continue using the same bottom-up discipline, rooted in our belief that high-quality companies that compound shareholder value are the most powerful and reliable long-term drivers of strong performance.

Average Annual Total Returns Through 12/31/20 (%)

International Premier 13.32 15.74 15.74 10.67 13.40 9.29 9.29 12/31/10
MSCI ACWI x USA SC 18.56 14.24 14.24 4.59 9.37 5.95 5.95 N/A

Annual Operating Expenses: Gross 1.58 Net 1.44

1 Not annualized.

Important Performance and Disclosure Information

Important Performance and Expense Information

All performance information reflects past performance, is presented on a total return basis, reflects the reinvestment of distributions, and does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate, so that shares may be worth more or less than their original cost when redeemed. Shares redeemed within 30 days of purchase may be subject to a 2% redemption fee, payable to the Fund, which is not reflected in the performance shown above; if it were, performance would be lower. Current month-end performance may be higher or lower than performance quoted and may be obtained at www.royceinvest.com. Gross operating expenses reflect the Fund's total gross annual operating expenses for the Service Class and include management fees, 12b-1 distribution and service fees, and other expenses. Net operating expenses reflect contractual fee waivers and/or expense reimbursements. All expense information is reported as of the Fund's most current prospectus. Royce has contractually agreed, without right of termination, to waive fees and/or reimburse expenses to the extent necessary to maintain the Service Class's net annual operating expenses (excluding brokerage commissions, taxes, interest, litigation expenses, acquired fund fees and expenses, and other expenses not borne in the ordinary course of business) at or below 1.44% through April 30, 2021.

Current month-end performance may be obtained at our Prices and Performance page.

Notes to Performance and Other Important Information

The thoughts expressed in this report concerning recent market movements and future prospects for small company stocks are solely the opinion of Royce at December 31, 2020, and, of course, historical market trends are not necessarily indicative of future market movements. Statements regarding the future prospects for particular securities held in the Funds' portfolios and Royce's investment intentions with respect to those securities reflect Royce's opinions as of December 31, 2020 and are subject to change at any time without notice. There can be no assurance that securities mentioned in this report will be included in any Royce-managed portfolio in the future.

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